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?
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.
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A hypothetical open economy has a marginal propensity to import (MPI) equal to 0.2 and a marginal propensity to consume equal to 0.7 . Assume that the economy is initially in equilibrium. What is the spending multiplier of this economy?
a. 2 b. 1.4 c. 0.7 d. 0.9 e. Cannot be determined with the given information
The Consumer Price Index excludes all of the following, except one. Which one is included in the CPI?
a. Services purchased directly by consumers b. Raw materials c. Services purchased by the government d. Machinery purchased by firms e. Intermediate goods purchased by firms