Macroeconomics 19th Edition by Campbell McConnell , Stanley Brue,Sean Flynn

Exercise 2

Assume the following information for a hypothetical economy in year 1: money supply = $400 billion; long-term annual growth of potential GDP = 3 percent; velocity = 4. Assume that the banking system initially has no excess reserves and that the reserve requirement iS₁0 percent. Also suppose that velocity is constant and that the economy initially is operating at its full-employment real output. a. What is the level of nominal GDP in year 1?
b. Suppose the Fed adheres to a monetary rule through open-market operations. What amount of U.S. securities will it have to sell to, or buy from, banks or the public between yearS₁ and 2 to meet its monetary rule?