We have the following information for an economy.

Reserves = $50 billion; Currency = $250 billion. Required Reserve ratio =0.1 or 10 percent. The banks do not hold any excess reserve. Furthermore, the money market is currently in equilibrium and the current nominal GDP, $Y is $1875 billion. Demand for money is given by M^D = $Y(0.5-2i), where i is the interest rate.

(a) Suppose the Fed wishes to increase the interest rate by ½ percentage point (i.e., by .005). Calculate the amount by which the Fed should adjust the overall supply of money. Determine the amount and the nature of the Open Market Operations that the Fed will need to undertake to accomplish this goal. Specifically calculate the amount of bond purchase or sale that the Fed will have to undertake. (Round your answer to two decimal places).

(b) Calculate the lowest amount of money supply that leads to a liquidity trap. What is the effect of a 5% increase in money supply after that amount?

Answer rating: 100% (QA)

aThe amount by which the Fed should adjust the overall supply of money is 033 billion Y Reserves Cur... View the full answer