Suppose that the required reserve ratio for checking deposits us 10% and that banks do not hold any access reserves.
a. If the Fed sells $1 million of government bonds, what is the effect on the economy’s money supply?
b. Use a money market diagram to show the impact of this policy in the money market-show what happens to equilibrium interest rates and money stock.
c. Use an AS/AD diagram to illustrate the impact of this policy on equilibrium price level and real GDP.