How are the assets and liabilities changed for a bond dealer, the bond dealer's bank, and the Fed when the Fed buys $100,000 in bonds?
What will be an ideal response?
The bond dealer trades a bond for a transactions deposit of $100,000. That is, the form of the assets change but not the total value. Assets and liabilities of the bank increase by $100,000 since transaction deposits increase when the Fed deposits the funds, and the bank's reserves increase by the same amount. The assets of the Fed increase by $100,000 when it buys the bond and its liabilities increase by $100,000 because reserves of the bank on deposit with the Fed increase. The money supply increases as the bond is converted into money.
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In the coordination failure model, the "good" equilibrium is characterized by a
A) higher real interest rate and a higher price level than the "bad" equilibrium. B) higher real interest rate and a lower price level than the "bad" equilibrium. C) lower real interest rate and a higher price level than the "bad" equilibrium. D) lower real interest rate and a lower price level than the "bad" equilibrium.