Question

Assume that the reserve requirement is 10 percent. Also assume that banks do not hold excess reserves and there is no cash held by the public. The Federal Reserve decides that it wants to expand the money supply by $50 million using open-market operations. In order to accomplish its goal, the Fed needs to $____________ million worth of bonds.

Answer 1

$5 million

Step-by-step explanation:

Required reserves is the percentage of deposits required of banks to keep as reserves by the central bank

Required reserves = reserve requirement x deposits

Increase in the total value of checkable deposit is determined by the money multiplier

Money multiplier = amount deposited / reserve requirement

0.1 x 50 million = 5 million