Question

After a sluggish quarter, the Federal Reserve decides to increase the money supply in the economy. When the money-creation process is complete, the Fed wants there to be $20 billion worth of new funds in the money supply. If the required reserve ratio is 5%, what is the simple money multiplier, and by how much should the Fed initially increase the money supply

Answer 1

20 and $1 billion

Step-by-step explanation:

The computation is shown below"

We know that

Money multiplier = 1 ÷ required reserve ratio

= 1 ÷ 0.05

= 20

Now the amount that would increase the money supply is

= $20 billion ÷ $20

= $1 billion

Hence, in this way it should be determined so that the chances of getting right answers would be high

Therefore the same is relevant