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Suppose that the required reserve ratio is 20%, that banks lend to the full extent permissible, and all money is held in the form of checking deposits. If THE FED wants to increase the money supply by $2,000,000, how should the FED adjust its bond holdings. Use a negative number (with a minus sign) to represent the Fed selling bonds or a positive number to represent the Fed purchasing of bonds. Round to the nearest $1. Do not use a dollar sign ($), comma (,), or decimal point (.) in your answer.

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Answer:

Step-by-step explanation:

Required reserve ratio = 20%

Money multiplier = 1/20% = 5

Increase in money supply required =$2000000

In this case, Fed will buy the bonds to inject the money of required amount.

So,

Fed's purchase of bonds required = 2000000/5

Fed's purchase of bonds required = 400000

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