exam 3 sample answers100 f 08

exam 3 sample answers100 f 08 - Exam Three – Economics...

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Unformatted text preview: Exam Three – Economics 100 Outlines of Possible Answers (15 points) 15. Describe the sale of bonds and how it will affect spending. Do not go beyond its initial affect on spending, but do describe every step in the process up to and including the point spending starts to change. Explain your logic. Fed offers bonds for sale. Buyers write checks to Fed. Fed removes reserves from bank. Bank removes deposits from buyers’ accounts. Banks do not have sufficient reserves. Loans are contracted As that happens deposits disappear and required reserves decline by a portion. Explain why. This continues until the money supply has decreased enough so that the banks have sufficient reserves to meet their requirements. Money supply is reduced and lenders want to borrow more than banks want to lend at the initial interest rate. Thus banks raise interest rates. Borrowers borrow less. This process continues until an equilibrium is reached where the quantity of money supplied is equal to the quantity of money demanded. The rise in interest rates and where the quantity of money supplied is equal to the quantity of money demanded....
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exam 3 sample answers100 f 08 - Exam Three – Economics...

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