Question

Ssume that the mpc is 0.8 and the reserve requirement is 0.1. if the federal reserve needs to increase aggregate demand by $100 billion at each price level to move the economy back to full employment and the current interest rate is 7%, then the federal reserve should _________ the money supply by ________.

Answer 1

To increase aggregate demand by $100 billion and move the economy to full employment, given an MPC of 0.8 and a reserve requirement of 0.1, the Federal Reserve should increase the money supply by $10 billion.

Step-by-step explanation:

The student is asking about the actions the Federal Reserve should take to increase aggregate demand by $100 billion to move the economy back to full employment while considering the marginal propensity to consume (MPC) is 0.8 and the reserve requirement is 0.1. When the Fed conducts an expansionary monetary policy, it typically buys bonds to increase the money supply. This increase in money supply can lower interest rates, which in turn stimulates investment and can affect net exports positively by altering the exchange rate. An increase in investment and net exports shifts the aggregate demand curve to the right. The multiplier effect can then amplify the initial stimulus provided by the Fed.

To calculate the necessary change in the money supply, we use the simple money multiplier formula: 1 / Reserve Requirement. In this case, the multiplier would be 1 / 0.1 = 10. With a multiplier of 10, to achieve a $100 billion increase in aggregate demand, the Federal Reserve would need to increase the money supply by $10 billion ($100 billion / 10 = $10 billion).

Answer 2

0.7 that si probably it