Exercises - Money, Banking, and Financial Institutions - Money Creation - Interest Rates and Monetary Policy True / False Questions 1. Checkable deposits held in savings and Joan institutions, mutual savings banks, and credit unions are part of the M1 definition of the money supply. J 2. Currency and coins held by banks are part of the MI definition of money supply. 3. When you use money to purchase groceries, money is functioning as a store of value. 4. The supply of money increases when the public buys government securities from commercial banks-F 5. The banking system can lend by a multiple of its excess reserves because lending does not result in a loss of reserves to the banking system as a whole” T 6. An individual bank can safely lend out a multiple of its excess reserves, but the banking system can safely lend out only an amount equal to the excess reserves in the banking system. 7. The higher the reserve requirement, the lower is the monetary multiplier. | 8. When a bank accepts additional deposits, its required reserves and excess reserves will both increase. | 9. When a bank grants a loan, the money supply MI will increase, even if the funds from the loan are not spent. 10, A bank has reserves of $30,000 and deposits of $120,000. If the reserve ratio is 10 percent, then this bank can lend out a 12. The higher the interest rate, the larger will be the amount of money demanded for transaction purposes. F 13. The Fed reduces interest rates mainly by selling government securities. F 14. When the Fed raises interest rates on excess reserves, they are attempting to encourage bank lending. 15. A restrictive monetary policy reduces investment spending and shifis the economy's aggregate demand curve to the right. 16. When commercial banks borrow from. the Federal Reserve Banks, they decrease their excess reserves and their money- creating potential. F 17. An expansionary monetary policy increases the money supply, lowers interest rates, and increases aggregate demand." ; ons nit Multiple Choice Questions 1. Money functions as A.astore of value. B.a unit of account. C.a medium of exchange. a store of value, a unit of account, and a medium of exchange. 2. If you are estimating your total expenses for school next semester, you are using ‘money primarily as A.a medium of exchange. ‘maximum of $12,000 in new loans(F © ¥2° B. a store of value. 11. If the banking system has $20 billion in excess reserves and the reserve ratio is 10 percent, the system can increase its loans by a maximum of $22 billion. a a unit of account, D. an economic investment.3. If you write a check on a bank to purchase a used Honda Civic, you are using money rimarily as Ja medium of exchange. B. a store of value. C. a unit of account. D. an economic investment. 4. In the United States, the money supply (M1) includes Q coins, paper currency, and checkable deposits. B. currency, checkable deposits, and Series E bonds. C. coins, paper currency, checkable deposits, and credit balances with brokers. D. paper currency, coins, gold certificates, and time deposits. 5. Currency held in the vault of First National Bank is A. counted as part of M1. B. counted as part of M2 but not M1. C. only counted as part of MI if it was deposited into a checking account. ‘not counted as part of the money supply. 6. Currency in circulation is part of A Mlonly. B. M2 only. C. neither M1 nor M2. ©) both Mi and M2. 7. Coins in people's pockets and purses are A. included in M1 but not in M2. (B) included both in M1 and in M2. C. included in M2 but not in M1. D. excluded from MI and M2 because people can exchange them for Federal Reserve notes. 8. Assuming no other changes, if checkable deposits increase by $40 billion and currency in circulation decreases by $40 billion, the MI money supply will decline. ‘M1 money supply will not change. “M2 money supply will decline. D. M2 money supply will increase. 9, Assuming no other changes, if checkable deposits decrease by $40 billion and balances in money market mutual funds imeyease by $40 billion, the 1 money supply will decline and the M2 money supply will remain unchanged. B. MI and M2 money supplies will not change. C. MI money supply will increase and the ‘M2 money supply will remain unchanged. D. MI and M2 money supplies will both decline. 10. Assuming no other changes, if balances in money market deposit accounts increase by $50 billion and small-denominated time deposits decrease by $50 billion, the (AJMI and M2 money supplies will not change. B. M2 money supply will increase. C. MI money supply will decline. D. M2 money supply will increase and the MI money supply will decrease. 11. The main function of the Federal Reserve System is to A. serve as the fiscal agent for the federal goverment. B. set reserve requirements of banks. C. clear checks from member banks. ©)eontrot the money supply.12. The Federal Reserve System performs the following functions except A. issuing the paper currency in the ‘onomy. providing banking services to the general public. C. providing financial services to the Federal government. D. lending money to banks and thrifts. 13. Bank panics A. occur frequently in fractional reserve banking systems. are a risk of fractional reserve banking but are unlikely when banks are highly regulated and lend prudently. C. cannot occur in a fractional reserve banking system. D. occur more frequently when the monetary system is backed by gold. 14. A bank that has liabilities of $150 billion and a net worth of $20 billion must have A. excess reserves of $130 billion. B. assets of $150 billion. C. excess reserves of $150 billion. assets of $170 billion. 15. The ABC Commercial Bank has $5,000 in excess reserves, and the reserve ratio is 30 percent. This information is consistent with ¢ bank having 90,000 in outstanding loans and $35,000 in reserves. B. $90,000 in checkable deposit liabilities and $32,000 in reserves. C. $20,000 in checkable deposit liabilities and $10,000 in reserves. D. $90,000 in checkable deposit liabilities and $35,000 in reserves. 16. Suppose a commercial bank has checkable deposits of $100,000 and the legal reserve ratio is 10 percent. If the bank's required and excess reserves are equal, then its actual reserves ‘A. are $1,000,000. B. are $10,000. Gate $20,000. D. cannot be determined from the given information. Reserve | Checkable | Actual] Excess Requirement | Deposits | Reserves | Reserves (0) wiw $100,000_| $10,000_| $0 Q) [8 x 20,000 _| 12,000 @)|2 200,000 |Y 8,000 (a) [20 300,000 | 70,000, [Z 17. The accompanying table gives data for a commercial bank or thrift. In row 1, the number appropriate for space W is A.4. B.6. ©. Dz 12. 18. The accompanying table gives data for a commercial bank or thrift. In row 2, the number appropriate for space X is A. $20,000. B. $60,000. $200,000. 0 $100,000. 19. The accompanying table gives data for a commercial bank or thrift. In row 3, the umber appropriate for space Y is A. $24,000. GQ) 532.000. C. $48,000. D. $96,000.20. The accompanying table gives data for a commercial bank or thrift. In row 4, the number appropriate for space Z is $10,000. . $70,000. C. $48,000. D. zero. 21. Suppose the ABC bank has excess reserves of $4,000 and outstanding checkable deposits of $80,000. If the reserve requirement is 25 percent, what is the size of the bank's actual reserves? A. $16,000 - $84,000 $24,000 . $20,000 22. Suppose the reserve requirement is 10 percent. Ifa bank has $5 million of checkable deposits and actual reserves of $500,000, the bank A. can safely lend out $500,000. B. can safely lend out $5 million. can safely lend out $50,000. ‘annot safely lend out more money. 23. Assume that a bank initially has no excess reserves. If it receives $5,000 in cash from a depositor and the bank finds that it can safely lend out $4,500, the reserve requirement must be D. 25 percent. 24. A commercial bank can expand its excess reserves by demanding and receiving payment on an Overdue loan. B. buying bonds from a Federal Reserve Bank. C. buying bonds from the public. D. paying back money borrowed from a Federal Reserve Bank. 25. Assume Company X deposits $100,000 in cash in commercial Bank A. If no excess reserves exist at the time this deposit is made and the reserve ratio is 20 percent, Bank A can increase the money supply by a maximum of A. $50,000. B. $180,000. $80,000. . $500,000. 26. Assume that Smith deposits $600 in currency into her checking account in the XYZ Bank. Later that same day, Jones negotiates a loan for $1,200 at the same bank. In what direction and by what amount has the supply of money changed? A. decreased by $600 B. increased by $1,800 C. increased by $600 CD) increased by $1,200 27. Assume the Standard Intemet Company negotiates a loan for $5,000 from the Metro National Bank and receives a checkable deposit for that amount in exchange for its promissory note (IOU). As a result of this transaction, @ the supply of money is increased by $5,000. B. the supply of money declines by the amount of the loan. C.a claim has been "demonetized." D. the Metro Bank acquires reserves from other banks.28, Banks create money when they A. allow loans to mature. B. accept deposits of cash. buy government bonds from households. D. sell government bonds to households. 29. Which of the following would reduce the money supply? A. Commercial banks use excess reserves to buy government bonds from the public. B. Commercial banks loan out excess serves. Commercial banks sell government bonds. To the public, D. A check clears from Bank A to Bank B. 30. The multiple by which the commercial banking system can expand the supply of joney on the basis of excess reserves is larger, the smaller the required reserve Tatio. B. is the reciprocal of the bank's actual reserves. C. is directly or positively related to the size of the required reserve ratio. D. will be zero when the required reserve ratio is 100 percent. 31. If D equals the maximum amount of new demand-deposit money that can be created by the banking system on the basis of any given amount of excess reserves; E equals the amount of excess reserves; and m is the monetary multiplier, then =EID. 32. Suppose a commercial banking system has $100,000 of outstanding checkable deposits and actual reserves of $35,000. If the reserve ratio is 20 percent, the banking system can expand the supply of money by the maximum amount of A. $122,000. B. $175,000. $300,000. (D))s75,000. 33. Money is destroyed when A. loans are made. B. checks written on one bank are deposited ip another bank. loans are repaid. D. the net worth of the banking system declines. 34. If the Federal Reserve System sells $5 billion of goverment securities to commercial banks, the banks' reserves would A, inerease by $5 billion decrease by $5 billion. C. be added to net worth. D. remain the same. 35. The asset demand for money is most closely related to money functioning as a A. unit of account, . medium of exchange. 6 store of value. D. measure of value. 36. The total demand for money curve will ift to the right as a result of an increase in nominal GDP. B. an increase in the interest rate. C. a decline in the interest rate. D. a decline in nominal GDP.37. If the quantity of money demanded exceeds the quantity supplied, A. the supply-ofmoney curve will shift to the left. B. the demand-for-money curve will shift to the right. Oe interest rate will rise. . the interest rate will fall. 38. If the demand for money and the supply of money both decrease, the equilibrium A. interest rate will decline, but we cannot predict the change in the equilibrium quantity of money. B. quantity of money and the equilibrium interest rate will both increase. C. quantity of money will increase, but we © cannot predict the equilibrium interest rate. quantity of money will decline, but we cannot predict the change in the equilibrium interest rate. change in the 39. The purchase of government securities from the public by the Fed will cause commercial bank reserves to decrease. 6 the money supply to increase. C. demand deposits to decrease. D. the interest rate to increase. 40. Assume that a single commercial bank has no excess reserves and that the reserve ratio is 20 percent. If this bank sells a bond for $1,000 to a Federal Reserve Bank, it in expand its loans by a maximum of Gjsioe. B- $2,000. C. $800, D. $5,000. 41. Answer the question on the assumption that the legal reserve ratio is 20 percent. Suppose that the Fed sells $500 of government securities to commercial banks (paid for out of commercial bank reserves) and buys $500 of securities from individuals, who deposit the cash in checking accounts. As a result of the given transactions, the supply of money in the economy will A. remain unchanged. (B) rise by $500. - fall by $100. D. fall by $500. hen the Fed sells bonds to the bank id the public, the expected result is that the supply of federal funds will fall, the federal funds rate will rise, and a contraction of the money supply will occur. B. the supply of federal funds will rise, the federal funds rate will fall, and an expansion of the money supply will occur. C. the supply of federal funds will fall, the federal funds rate will fall, and an expansion of the money supply will occur. D. the supply of federal funds will rise, the federal funds rate will rise, and a contraction of the money supply will occur. 43. Which of the following best describes the cause-effect chain of an expansionary monetary policy? A. A decrease in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP. B. A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP. C. An increase in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP. (°) An increase in the money supply will 6lower the interest rate, increase investment spending, and increase aggregate demand and GDP. A contraction of the money supply (A increases the interest rate and decreases iggregate demand. B. increases both the interest rate and aggregate demand. C. lowers the interest rate and increases aggregate demand. D. lowers both the interest rate and aggregate demand. 45. Which of the following actions by the Fed would cause the money supply to increase? purchases of government bonds from banks B. an increase in the reserve requirement C. an increase in the discount rate D. sales of government bonds to the public 46. Assume the economy is operating at Jess than full employment. An expansionary monetary policy will cause interest rates to . Which will investment spending. A. decrease; decrease @) decrease; increase C. increase; increase D. increase; decrease 47. If the economy were encountering a severe recession, proper monetary and fiscal policies would call for A. selling government securities, raising the reserve ratio, lowering the discount rate, increasing interest paid on reserves held at Fed banks, and a budgetary surplus. ying government securities, reducing the reserve ratio, reducing the discount rate, reducing interest paid on reserves held at Fed banks, anda budgetary deficit. C. buying government securities, raising the reserve ratio, raising the discount rate, reducing interest paid on reserves held at Fed banks, anda budgetary surplus. D. buying government securities, reducing the reserve ratio, raising the discount rate, reducing interest paid on reserves held at Fed banks, anda budgetary deficit. 48. If the Fed buys government securities from commercial banks in the open market, A. the Fed gives the securities to the commercial banks and increases the banks' reserves. B. the Fed gives the securities to the commercial banks and decreases the banks’ reserves. C. commercial banks give the securities to the Fed, and the Fed increases the banks' serves. :ommercial banks give the securities to the Fed, and the Fed decreases the banks' reserves. 49. The Federal Reserve could reduce the money supply by A. lowering the required reserve ratio. B. buying government bonds in the open market. increasing the interest on reserves. D. reducing the discount rate. 50. Assume that there is a 25 percent reserve ratio and that the Federal Reserve buys $200 million worth of goverment securities. If the securities are purchased from the public, then this action has the potential to increase bank lending by a maximum of A. $600 million, and also by $600 million if the securities are purchased directly from commercial banks. B. $800 million, and also by $800 millionif the securities are purchased directly from ‘ommercial banks. (Gsso0 million, but by $800 million if the securities are purchased directly from commercial banks. D. $800 million, but only by $600 million if the securities are purchased directly from commercial banks. 51. Assume that there is a 25 percent reserve ratio and that the Federal Reserve buys $4 billion worth of government securities. If the securities are purchased from the nonbank public, this action has the potential to increase money supply by a maximum of A. $16 billion, but only by $14 billion if the securities are purchased directly from commercial banks. B. $14 billion, but by $16 billion if the securities are purchased directly from commercial banks. (pr billion, and also by $16 billion if he securities are purchased directly from commercial banks. D. $14 billion, and by $20 billion if the securities are purchased directly from commercial banks. 52. Assume that the required reserve ratio is 20 percent. If the Federal Reserve buys $80 million in government securities from the general public, then the money supply will immediately A. increase by $0 with this transaction, and the maximum money-lending potential of the commercial banking system will increase by $400 million. B. increase by $0 with this transaction, but the maximum money-lending potential of the commercial banking system will increase by $320 million. C. increase by $80 million with this transaction, and the maximum money- lending potential of the commercial banking system will increase by another 00 million. 'D.) increase by $80 million with this Fansaction, and the maximum money- lending potential of the commercial banking system will increase by another $320 million. 53. Assume that the required reserve ratio is 20 percent. If the Federal Reserve buys $80 million in government securities from commercial banks, then the money supply will immediately lincrease by $0 with this transaction, and maximum money-lending potential of the commercial banking system will increase by $400 million. B. increase by $0 with this transaction, but the maximum money-lending potential of the commercial banking system will increase by $320 million. C. increase by $80 million with this transaction, and the maximum money- lending potential of the commercial banking system will increase by another $400 million. D. increase by $80 million with this transaction, and the maximum money- lending potential of the commercial banking system will increase by another $320 million. 54. Assume that the required reserve ratio is 25 percent. If the Federal Reserve sells $120 million in government securities to the general public, the money supply will jpymediately decrease by $120 million with this transaction, and the decrease in money supply could eventually reach a maximum of $480 million. 8B. decrease by $120 million with this transaction, and the decrease in money supply could eventually reach a maximum of $360 million. C. increase by $120 million with this transaction, and the increase in money supply could eventually reach a maximum of $480 million. D. increase by $120 million with this transaction, and the increase in money supply could eventually reach a maximum of $360 million. 55. Assuming that the Federal Reserve Banks sell $40 million in government securities to commercial banks and the reserve ratio is 20 percent, then the effect will be to reduce A. excess reserves by $8 million. B. excess reserves by $200 million. e money supply by potentially $200 million. D. the money supply by potentially $400 million. Short-Answer, Essays, and Problems 56. Assume that the required reserve ratio for the commercial banks is 25 percent. If the Federal Reserve Banks buy $3 billion in government securities from the nonbank securities dealers, then, as a result of this transaction, the lending ability of the commercial banking system will increase by $4.5 billion. $9 billion. C. $12 billion. D. $15 billion. 57. The level of GDP, ceteris paribus, will tend to increase when A. reserve requirements are increased. jere is an increase in the discount rate. the Federal Reserve buys goverment securities in the open market. D. the Federal Reserve sells government securities in the open market. 1. Use the figures in the table below to answer the following questions. Billions Small time deposits $1014 Money-market mutual funds held by businesses Savings deposits, including money-market deposit accounts 1190 Money-market mutual funds held by individuals Checkable deposits 3649 Currency 744 633 743 (a) What is the value of M1? (b) What is the value of M2?2. (Consider This) Are credit cards money? Explain. 3.Arrange the following items in the form of a commercial bank’s balance sheet, and explain how each might come into being. Stock shares, $300,000; Reserves, $60,000; Property, $290,000; Checkable deposits, $150,000; Securities, $40,000; Loans, $60,000 4.Use the following bank transactions to develop the bank’s balance sheet. To start the bank, owners issue $500,000 in stock to shareholders. Next, they purchase $200,000 worth of equipment and office space to establish the physical location of the bank. Finally, they open the bank and receive $750,000 in checkable deposits. With these reserves, they make $600,000 worth of loans. 5.Determine whether the following balance sheet item is an Asset or Liabilities/Net Worth for a bank: a) Loan to a business b) Checkable Deposits c) Reserves d) Securities 6. Using the balance sheet below and assuming a required reserve ratio of 20%, answer the following: (a) What is the amount of excess reserves? (b) This bank can safely expand its Joans by what amount? (c) By expanding its loans by this amount in part (b), its checkable deposits would expand to what amount (if all loans were made to checking account customers)? (d) If checks clear against the bank equal to the amount Joaned in (b), how much would remain in reserves and in checkable deposits? 7. Suppose the First National Bank has the following simplified balance sheet. The reserve ratio is 20%. Assets (all figures in thousands) Liabilities + Net Worth (1) (2) (1) (2) Reserves $40 Checkable $200 Securities 90 deposits Loans 70 Assume that households and businesses deposit $5000 in this bank and that this currency is added to the bank’s reserves.In column (1) show the bank’s balance sheet after this occurs. Is there a change in the money supply? Tn column (2) show what would happen if the bank now loans all of its excess reserves to a depositor. Is there a change in the money supply? 8.For each of the situations below determine whether the money supply will increase, decrease, or stay the same. (a) An individual deposit $100 of cash into a savings account, SOM (b) The bank makes a $10,000 loan to an individual for the pugrase ofa used car, ine, (c) A commercial bank sells goverment bonds to the public. 9.Jack deposits his money at Bank 1, while Maria deposits her money at Bank 2. Balance sheets for each bank are listed below. Bank 1 Assets Lial s + Net Worth Reserves$200,000 |Checkable deposits $400,000 Property600,000 Stock shares1,000,000 Loans 600,000 Bank 2 Assets Reserves$150,000 |Checkable deposits $300,000 Property250,000 Stock shares700,000 Loans 600,000 (a) What will the banks’ balance sheets look like when Jack writes a $50,000 check to Maria and the check clears? (b) The reserve ratio is 20%. What are each bank’s excess reserves after the check clears in @? (c) How many additional loans can each bank make when Jack writes Maria another check for $100,000? 10.Answer the next questions based on the following consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 25%. All figures are in billions of dollars. Assets Lial s + Net Worth Reserves $100 Checkable deposits $300 Securities 200 Stock shares 700 Loans 100 Property 600(a) What is the amount of excess reserves in this commercial banking system? 19 (b) What is the maximum amount that the money supply can be expanded? 100 (©) the reserve ratio fell to 28%, what is now the maximum amount thatthe money supply can be expanded? 20 0 02 -3e0= GO 30k ‘ee = 500 loo 60249 11.If the balance sheet below were for the entire banking system instead of just a single bank, ‘by how much could loans be expanded? Assume a reserve ratio of 20%. Assets Liabilities + Net Worth Reserves$ 40,000 |Checkable deposits $100,000 Securities70,000 Stock shares460,000 Loans 50,000 Property400,000 12.The total demand for money is equal to the transactions demand plus the asset demand for money. (a) Assume that each dollar held for transactions purposes is spent on the average five times per year to buy final goods and services. If the nominal GDP is $5000 billion ($5 trillion), what is the transaction demand? (b) The table below shows the asset demand at certain rates of interest. Using your answer to part (a), complete the table to show the total demand for money at various rates of interest. Interest Asset Total rate demand demand (in %) (billions) (billions) 10 =$ 40 slOWW 8 30 lovo 6 120 «=e 4 160 We (c) If the money supply is $1080 billion, what will be the equilibrium rate of interest? & (d)If the money supply rises, will the equilibrium rate of interest rise 0 (@) If GDP rises, will the equilibrium rate of interes¢is9)or fall? 13.Use the graph below to answer the following questions. D; is the transactions demand for money, Dp, is the total demand for money, and S;, is the supply of money. (a) What is the transactions demand for money in this market? (b) What is the asset demand for money if the interest rate is 4%?(c) If the money market is in equilibrium at 6%, describe the change that must occur for the equilibrium rate to change to 4%. (d)If the money market is in equilibrium at 6% and the money supply has increased to Sy, by how much has total demand for money changed? 14.Use the table below for the next set of questions. Column | shows the interest rate, column 2 shows the demand for money, and columns 3-5 show the supply of money. All quantities are in millions ($). ay 2 8 @& & Interest Dn Snz rate ZY % 10% $1500 $2200 $2500 $1800 8 1800 2200 2500 1800 6 2200 2200 2500 1800 a 4 2500 2200 2500 1800 — 2 2800 2200 2500 1800 (a) Given the demand for money, what will the equilibrium interest rate be for each of the different supply of money schedules? (b) Assume the economy was in equilibrium at D,, and S,,;. If the FED decides to change the money_supply to Sy. and the interest rate stays the same, how much of a shortage or Gurplus in the money suppl}ywill there be? Describe what will happen in the money market and the bom ¢ eliminate the surplus or shortage and restore a new equilibrium interest rate. So (c) Assume the economy was in equilibrium at D,, and S,,. If the FED decides to change the money supply \d the interest rate stays the same, how much of aGhortagp or surplus in th Will there be? Describe what will happen in this money market and the bond market t0Sajminate the surplus or shortage of money and restore a new equilibrium interest rate. ° 15.Other things being equal, what effect will each of the following have on the equilibrium rate of interest? (a) an increase in the supply of money; (b) an increase in the equilibrium level of national income; (c) a decrease in the supply of money; (d) a leftward shift of the asset demand for money. 16.The following are simplified balance sheets for the commercial banking system and the Federal Reserve System. Perform each of the following three transactions, a, b, and ¢, making appropriate changes in columns (1) through (3) in each balance sheet. Do not cumulate your answers. Also, answer these three questions for each part: (a) What change, if any, took place in the money supply as a direct result of this transaction? (b) What change, if any, occurred in commercial bank reserves? (c) What change occurred in the Bmoney-creating potential of the commercial banking system if the reserve ratio is 20%? All figures are in billions of dollars. Consolidated Balance Sheet: Commercial Banking System () Q) Q) Assets: Reserves. $50 8 S$ S$. Securities 75 et Loans 75 Liabilities: Checkable deposits 190 Loans from FRBs 10 Consolidated Balance Sheet: Federal Reserve Banks () Q) (3) Assets: Securities $90 S$ 8, $ Loans to CBs 10 Liabilities: Reserves of CBs 50 Treasury deposits 10 Federal Reserve notes 10 (a) Suppose a drop in the discount rate causes commercial banks to borrow an additional $3 billion from the Fed. Show the new sheet figures in column 1. (b) The Fed buys $2 billion of government bonds from the public. Show the new sheet figures in column 2. (c) The Treasury spends $1 billion on research on new farm products. Show the new sheet figures in column 3. 17.Use the below graphs to answer the following questions assuming the nominal GDP in the economy is given. (a) Look at graph A and suppose the supply gf money increases from 100 to 200. What will be the equilibrium rate of interest? (° 7 (b) Look at graph B which shows an investment-demand curve for this economy. Given the answer to part (a) above, how much will investors plan to spend on capital goods? (2° (c) What will happen to aggregate demand? Yf7 (d) Now trace what will happen in parts (a)-(c) if the money supply increases to $300.Interest rate (%) Amount of money demanded and supplied ($) “a | H 70 120 170 Investment ($) (8) Real GDP