Suppose the Fed decided to purchase $100 billion worth of government securities in the open market which are directly deposited into the banking system. What impact would this action have on the economy? Specifically, answer the following questions: 

(a) How will M1 be affected initially? 

(b) By how much will the banking system’s lending capacity increase if the reserve requirement is 20 percent? 

(c) Must interest rates rise or fall to induce investors to utilize this expanded lending capacity? 

(d) By how much will aggregate demand increase if investors borrow and spend all the newly available credit? 

(e) Under what circumstances (A = “recession” or B = “inflation”) would the Fed be pursuing such an open market policy? 

(f) To attain those same objectives, what should the Fed do (A = “increase” or B = “decrease”) with the 

(i) Discount rate? 

(ii) Reserve requirement?