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Monetary Policy

  1. Suppose the required reserve ratio is 8%. If the Fed sells $50,000 worth of

bonds, what is the maximum increase in the money supply that could occur from this transaction?

  1. Suppose that nominal GDP is $18 trillion, real GDP is $12 trillion, and the money supply is $3.6 trillion. Assume throughout this question that the velocity of money is constant.
  • What is the price level? What is the velocity of money?


  • If real GDP increases by 10%, and the Fed does not accommodate this growth by increasing the money supply, what will be the new price level?


  • Again assume that real GDP increases by 10%, how much must the Fed change the money supply in order to keep the price level constant? You should use the quantity equation to calculate the exact change needed in the money supply - don't just give a percentage change.


  • If the Fed desires 2% inflation, by how much should they change the money supply? Again, I am looking for the change in dollars, not a percentage.

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