Author Question: Suppose the Fed purchases 1 million in bonds in the open market. Explain how the money supply can ... (Read 61 times)

Chelseaamend · **on:** Jun 30, 2018

Suppose the Fed purchases 1 million in bonds in the open market. Explain how the money supply can increase by more than 1 million.

What will be an ideal response?

Question 2

A movement along the consumption function shows the change in consumption expenditure as a result of a change in

A) disposable income.
B) the interest rate.
C) net taxes.
D) the price level.
E) saving.

aham8f · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

Transaction deposits and reserves increase by 1 million as a result of the purchase. Since the reserve ratio is less than one, the bank now can loan some of the reserves to someone. If it does, then the transaction deposits of the borrower increase by the amount of the loan, so the money supply has increased further.

Answer to Question 2

A