Question

The Fed purchases $200 worth of government bonds from the public. The reserve requirement is 8 percent, people hold no currency, and the banking system keeps no excess reserves. The U.S. money supply eventually increases by _________.
a. $25.b. between $200 and $300.c. $1,600.d. $2,500.

Answer 1

Answer:

The correct answer is $2,500.

Explanation:

According to the scenario, the computation of the given data are as follows:

Deposits = $200

Reserve requirement ratio = 8%

So, we can calculate the Increase in money supply by suing following formula:

Increase in money supply = Deposit ÷ Reserve requirement ratio

By putting the value, we get

= $200 ÷ 0.08

= $2,500.