Question

Suppose the reserve requirement for the United States is 15%. Suppose the Federal Reserve wants to increase the money supply. What should it do to accomplish this goal? The Fed could make an (open market sale / open market purchase) of $30 billion, resulting in a total increase in the money supply of $______

Answer 1

The total increase in the money supply will depend on the amount of the open market purchase, in this case, it would be $200 billion from a $30 billion purchase.

Step-by-step explanation:

If the Federal Reserve wishes to increase the money supply, it will conduct what is known as an open market purchase. In this scenario, the Federal Reserve buys bonds. This hypothetical scenario imagines a purchase of $30 billion worth of bonds. To increase the money supply, the Federal Reserve should conduct an open market purchase. By buying Treasury bonds on the open market, the Fed injects money into the banking system.

This increases the reserves of banks, allowing them to lend out more money and ultimately expanding the money supply. The amount of money supply increase will depend on the amount of the open market purchase, but in this case, if the Fed made a purchase of $30 billion, the total increase in the money supply would be $200 billion.