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What money supply should the fed set next year

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Reference no: EM132878997

Question 1. If the Fed sells $2 million of government bonds, what is the effect on the economy's reserves and money supply?

Question 2. Now suppose that the Fed lowers the reserve requirement to 2.5 percent but that banks choose to hold another 5 percent of deposits as excess reserves. Why might banks do so? What is the overall change in the money multiplier and the money supply as a result of these actions?

Question 3. (25%) Suppose that this year's money supply is $150 billion, nominal GDP is $8 billion, and real GDP is $4 billion.

a. What is the price level? What is the velocity of money?

b. Suppose that velocity is constant and the economy's output of goods and services rises by 5 percent each year. What will happen to nominal GDP and the price level next year if the Fed keeps the money supply constant?

c. What money supply should the Fed set next year if it wants to keep the price level stable?

Reference no: EM132878997

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