Assume banking systeam has reserves of $750,000, demand deposits of $2,500,000 and the reserve requirment of 20%.
i) If Fed now buys $125,000 worth of government bonds from public, find excess reserves of bankings system? Suppose public deposits entire $125,000 in demand deposits.
ii) How much can the banking system increase the money supply by, given the new reserve position?
iii) Using graphs, describe in detial how change in money supply affects investment demand and as the consequence, aggregate demand. What role spending multiplier plays in the process? Describe.
iv) Explain impact of Fed's actions on GDP, unemployment and inflation?