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MMLU / Suppose the reserve ratio is 10 percent and the Fed buys …

Problem

Answer published by the source. Consult the official source to check your work against its answer.

question

Suppose the reserve ratio is 10 percent and the Fed buys $1 million in Treasury securities from commercial banks. If money demand is perfectly elastic which of the following is likely to occur?

choices

  1. Money supply increases by $10 million lowering the interest rate and increasing AD.
  2. Money supply remains constant the interest rate does not fall and AD does not increase.
  3. Money supply increases by $10 million the interest rate does not fall and AD does not increase.
  4. Money supply decreases by $10 million raising the interest rate and decreasing AD.

subject

high_school_macroeconomics

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