Question

If the reserve ratio is 8 percent, banks do not hold excess reserves, and people do not hold currency, then when the Fed purchases $20 million of government bonds, bank reserves Group of answer choices increase by $20 million and the money supply eventually increases by $250 million. decrease by $20 million and the money supply eventually increases by $250 million. increase by $20 million and the money supply eventually decreases by $250 million. decrease by $20 million and the money supply eventually decreases by $250 million.

Answer 1

increase by $20 million and the money supply eventually increases by $250 million.

Step-by-step explanation:

The reserve requirement is 8%.

The bank does not hold any excess reserves.

The fed purchases $20 million of government bonds. This would the reserve with the bank to increase by $20 million.

The money supply will increase by $20 million times money multiplier.

The increase in money supply

=
`\frac {1}{RR}* Change\ in\ reserves`

=
`\frac {1}{0.08}* 20 million`

= $250 million