Assume that the following conditions exist:
a. All banks are fully loaned up-there are no excess reserves, and desired excess reserves are always zero.
b. The money multiplier is 4.
c. The planned investment schedule is such that at a 4 percent rate of interest, investment is $1,400 billion. At 5 percent, investment is $1,380 billion.
d. The investment multiplier is 5.
e. The initial equilibrium level of real GDP is $19 trillion.
f. The equilibrium rate of interest is 4 percent. Now the Fed engages in contractionary monetary policy. It sells $2 billion worth of bonds, which reduces the money supply, which in turn raises the market rate of interest by 1 percentage point. Determine how much the money supply must have decreased, and then trace out the numerical consequences of the associated increase in interest rates on all the other variables mentioned.