Question

If the fed buys $25 billion of u.s. bonds in the open market and the reserve requirement is 20 percent, m1 will eventually:___.

Answer 1

M1 will eventually Increase by $125 billion. If the fed buys $25 billion of u.s. bonds in the open market and the reserve requirement is 20 percent.

U.S. savings bonds are a form of government debt issued to American citizens to help fund federal expenditures.

Savings bonds are sold at a discount and mature to their full face value, and do not pay regular coupon interest.

Series EE bonds are sold at half of face value and mature in 20 years. Series I bonds are adjusted for inflation.

Initial Increase in Money Supply = $25 billion

Reserve Requirement = 20%

Money Multiplier = 1 / Reserve Requirement

Money Multiplier = 1 / ( 20 / 100 )

Money Multiplier = 100 / 20

Money Multiplier = 5

Total Increase in M1 = Money Multiplier X Initial Increases in Money Supply

Total Increase in M1 = 5 X 25

Total Increase in M1 = 125

Therefore, Total Increase in M1 is $125 billion.

Learn more about U.S. savings bonds here

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