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.

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.

anonymous · Answer

selling securities decreases the money supply, so the supply of money shifts left!  How much?  Well the money multiplier can help us with that, all it tells us the total impact of a change in the money supply.  The Fed is taking $1mil out of the economy but a multiplier of 5 means the ending effect will be 5 times bigger (so 5Mil).  This shift if you draw it, will increase interest rates.

Increasing interest rates impacts our Aggregate Demand, from the aggregate demand aggregate supply model.  When interest rates go up, companies stop investing as much.  that means the I component of GDP decreases, which shifts the AD curve to the left!  |dw:1399422939867:dw|

anonymous · Answer

This helps a lot. Thank you so much. Now I just have one more question that relates to this one.  with this what happens to the number of loans the unemployment rate the price level.  Also what would this do to the rest of the economy as a whole?

anonymous · Answer

These are very complex questions to answer online here!  But I will give it a shot.  

1. Number of loans: when there is less money flowing through the economy there are going to be fewer loans.

2.  The AD/AS model tries to capture an economy wide picture of whats happening (so that graph above does actually shows us the economy as a whole!

3.  We can use that graph above to talk about price levels and unemployment.  The Y axis of the above graph is prices!  So you can see that the shift in AD causes price levels to fall.

4.  Unemployment is a bit trickier but still not bad.  Look at the X axis of the graph..you can see it is looking at real GDP.  Well if real GDP goes down (like we can see in the graph) what do you think happens to employment?  With less production, fewer people can work so unemployment rises!

anonymous · Answer

Thanks so much for all of your help

anonymous · Answer

sure thing @devliegers let me know if you need anything else