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Suppose the Fed decided to sell $350 billion worth of governmentsecurities in the open market (assume all payments are are directlydeposited into or withdrawn from the banking system). What impactwould this action have on the economy? Specifically, answer thefollowing questions:

Instructions: Enter your responses as a wholenumber. If the lending capacity or aggregate demand falls be sureto include a negative sign (-) with your answer.

a. How will M1 be affected initially?

• increase by $350 billion

• no initial change to M1

• not enough information to answer

• decrease by $350 billion

b. By how much will the banking system’s lendingcapacity change if the reserve requirement is 10percent?

    $  billion

c. How must interest rates change to induce investors to utilizethis change in lending capacity?

     Interest rates must  (Clickto select)  fall  rise  .

d. By how much will aggregate demand initiallychange if investors change their behavior because of this change inavailable credit?

    $  billion

e. Under what circumstances would the Fed be pursuing such anopen market policy?

• expansion

• recession

f. To attain those same objectives, what should the Fed do withthe

     (i) Discount rate?

• increase

• decrease

     (ii) Reserve requirement?

• increase

• decrease