Question

I'm doing homework for my macroeconomics class and I have absolutely no idea what to do for this. Anyone care to explain?

1a.) GRAPH and Explain what would occur if the Fed sold 1 million dollars worth of government securities to an agent when the simple money multiplier is 5. Be sure to mention what happens to the number of loans made and interest rates.
b.)Graph and explain what would happen to the rest of the economy. Be sure to mention real GDP, price level, and
unemployment.

I don't remember ever learning this... -__-

Answer 1

(a) remember the money multiplier is used to determine how much much money should be created from each deposit . so if the government is to sell securities it can be seen as a way of increasing gross domestic income . remember securities are shares and mostly shares are issued with the aim of generating income .so since there will be more money that will be flowing from the money market this will decrease the investment hence the interest will decrease make t a point that people will have the opportunity of holding money because the money market will be having too much money flowing .the number of loans will increase as a result of low intrest rate bieng charged by banks .

Answer 2

(b) thus our gross domestic product will have to increase .