Question

The Federal Open Market Committee decides that it must increase the money supply by $50. Committee members tell you the reserve ratio is 0.2. They ask you what directive they should give to the open market desk. You tell them, being as specific as possible, using the money multiplier.

The Fed should _____________$ worth of government bonds.

Answer 1

Answer and Explanation:

As we know that

Multiplier Effect = 1 ÷ Reserve Ratio

So,

Reserve ratio = 1 ÷ 0.2

= 5

Now this means that $1 million deposit result into increased by $5 million in the overall money supply

So the money supply should rise by $50 and it should be $10 of the government securities