213k views
1 vote
Assume that the reserve requirement is 5 percent. All other things being equal, will the money supply expand more if the Fed buys $2,000 worth of bonds or if someone deposits in a bank $2,000 that she had been hiding in her cookie jar? If one creates more, how much more does it create? Support your thinking.

User Jeef
by
8.1k points

1 Answer

4 votes

Answer: See explanation

Step-by-step explanation:

Based on the information given in the question, the reserve ratio is given as 5%, then the money multiplier will be:

= 1 / reserve requirement

= 1/5%

= 1 / 0.05

= 20.

Therefore, the money multiplier will increase by 20.

Then, the Money supply will be calculated as:

= amount x money multiplier

= 2000 x 20

= 40000

Therefore, the increase in the money supply will be $40000.

In this case, if the FED purchases $2000 worth of bonds, it'll expand the money supply more.

No related questions found

Welcome to QAmmunity.org, where you can ask questions and receive answers from other members of our community.

9.4m questions

12.2m answers

Categories