Scenario 13.2 Assume the Following Conditions Hold

Scenario 13.2
Assume the following conditions hold.
A) At all banks, excess reserves are zero.
B) The deposit expansion multiplier is 3.
C) The spending multiplier is 5.
D) The initial equilibrium level of national income is $500 billion.
E) The initial equilibrium interest rate equals 6 percent.
F) The investment spending function is as illustrated in the figure below.
Now the Federal Reserve engages in an open market operation by purchasing $1 billion worth of government bonds from private bond dealers, who then deposit the $1 billion in the banks. This acts to lower the equilibrium interest rate by 2 percent.

-Refer to Scenario 13.2. What is the change in investment spending following the open market operation by the Fed?

A) $20 billion
B) $10 billion
C) +$20 billion
D) +$30 billion
E) +$50 billion

Correct Answer:

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