How the change in money supply affects investment demand

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Reference no: EM13157167

1. Suppose the banking systeam has reserves of $750,000, demand deposits of $2,500,000 and a reserve requirment of 20%.

a) If the Fed now purchases $125,000 worth of government bonds from the public, what are the excess reserves of the bankings system? ( Assume the public deposits the entire $125,000 in demand deposits.)

b) How much can the banking system increase the money supply by, given the new reserve position?

c) Using graphs, explain in detial how the change in money supply affects investment demand and as a consequence, aggregate demand. What role dose the spending multiplier play in this process? Explain.

d) What is the impact of the Fed's actions on GDP, unemployment and inflation?

Reference no: EM13157167

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