Suppose the current money supply is $6,000. The required reserve ratio is 0.2. The Fed wants to increase the money supply by $600. Determine the following:
All underlying work must be shown
a. What open market operation the Fed would have to take to achieve the stated desired change in the money supply.
b. Refer to the diagrams below, which one illustrates the open market operations the Fed would have to take to achieve the stated desired change in the money supply from your answer to part a?
c. Explain what will happen to these bonds prices and interest rates associated with these bonds
d. How much should the Fed buy or sell in the government bonds to achieve the stated desired change in the money supply.
e. What would the money supply in the economy be as the result of the Fed action?
f. What would happen to the short-term nominal interest rates?
g. Is the Fed making the policy more expansionary or contractionary? Explain