Assume that the banking system is loaned up and that any open-market purchase by
ID: 1190779 • Letter: A
Question
Assume that the banking system is loaned up and that any open-market purchase by the Fed directly increases reserves in the banks. If the required reserve ratio is 0.2, by how much could the money supply expand if the Fed purchased $2 billion worth of bonds? Assume that the banking system is loaned up and that any open-market purchase by the Fed directly increases reserves in the banks. If the required reserve ratio is 0.2, by how much could the money supply expand if the Fed purchased $2 billion worth of bonds? Assume that the banking system is loaned up and that any open-market purchase by the Fed directly increases reserves in the banks. If the required reserve ratio is 0.2, by how much could the money supply expand if the Fed purchased $2 billion worth of bonds?Explanation / Answer
If the required reserve ratio is 0.2, the money supply will expand by $2 billion*(1 - 0.2) = $1.6 billion if
the Fed purchased $2 billion worth of bonds.