Answer the next question on the basis of the following consolidated balance sheet of the commercial banking system. Assume that the reserve requirement is 10%. All figures are in billions.Assets (billions of dollars)Liabilities & Net Worth (billions of dollars)Reserves$60Checkable deposits$600Securities140Stock shares260Loans260 Property400 Suppose the Fed wants to increase the money supply by $400 billion to drive down interest rates and stimulate the economy. Assuming that the money multiplier is operating to full effect, to accomplish the desired increase, the Fed could ________.
A. sell $40 billion of U.S. securities to the banks
B. sell $20 billion of U.S. securities to the banks
C. buy $20 billion of U.S. securities from the banks
D. buy $40 billion of U.S. securities from the banks
Answer: D
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The aggregate expenditure model predicts a business cycle expansion occurs when
A) the aggregate planned expenditure curve shifts downward. B) aggregate supply increases. C) induced expenditure decreases. D) autonomous expenditure increases. E) potential GDP increases.
The fear of unwanted price wars may explain why many firms are reluctant to:
A. reduce wages when a decline in aggregate demand occurs. B. reduce prices when a decline in aggregate demand occurs. C. expand production capacity when an increase in aggregate demand occurs. D. provide wage increases when labor productivity rises.