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 5.
c. The planned investment schedule is such that at a 4 percent rate of interest, Investment =$1450 billion. At 5 percent, investment is $1430 billion.
d. The investment multiplier is 4.
e.. The initial equilibrium level of real GDP is $14 trillion.
f. The equilibrium rate of interest is 4 percent
Now the Fed engages in contractionary monetary policy. It sells $1 billion worth of bonds, which reduces the money supply, which in turn raises the market rate of interest by 1 percentage point. Calculate the decrease in money supply after FED's sale of bonds: _____ billion.
Calculate the decrease in money supply after? FED's sale of? bonds: ?$