Suppose the price of leather used to produce shoes increases. The ...

[justinmsk]

Suppose the price of leather used to produce shoes increases. The higher price of leather ________ the supply of shoes, and the supply curve of shoes ________.
 
  A) does not change; does not shift
  B) decreases; shifts rightward
  C) increases; shifts rightward
  D) increases; shifts leftward
  E) decreases; shifts leftward

Question 2

Why does the money supply increase when the Fed buys a bond but does not change when a business buys a bond?
 
  What will be an ideal response?

[af]

Answer to Question 1

E

Answer to Question 2

The reserves in the banking system increase when the Fed buys bonds but remain unchanged when a business buys bonds. When a business buys bonds, a check is written on one bank and deposited in another. The reserves of one bank increase but fall in the other, so there is no net change. When the Fed buys bonds, reserves increase in a bank but don't decrease anywhere else since the Fed can add to the reserves of a member bank.

[justinmsk]

Gracias!

[AngeliqueG]

Excellent