Question

For the following five questions, assume the following characteristics of the monetary transmission mechanism:

The money multiplier is 4.55

Interest rates will change by 2.25% for every $125 billion change in the money supply.

Investment will change by $95 billion for every 1.5% change in the interest rate.

Income will change by $7.3 billion for every $3.8 billion change in investment.

Identify the change in income when the Fed does the following:

1. Buys $35 billion in bonds.

2. Buys $18 billion in bonds.

3. Buys $5.5 billion in bonds.

4. Sells $12 billion in bonds.

5. Sells $28 billion in bonds.

Answer 1