Question

The Federal Reserve conducts a $30 million open-market purchase of government bonds. If the required reserve ratio is 15 percent, the largest possible increase in the money supply that could result ismillion, and the smallest possible increase ismillion?

Answer 1

Answer:

maximum amount money supply increase is $200 million

smallest possible amount money supply increase is $30 million

Explanation:

given data

purchase  government bonds = $30 million

reserve ratio = 15 percent

to find out

largest possible increase in the money and smallest possible increase

solution

we know that here money multiplier will be

money multiplier = $\frac{1}{required\ reserve\ ratio}$

money multiplier = $\frac{1}{0.15}$

money multiplier = 6.7

and

change in money supply will be

change in money supply = money multiplier × purchase bonds

change in money supply = 6.67 ×30

change in money supply = $200 million

so maximum amount money supply increase is $200 million

and

when bank hold $30 million as reserve

than money supply increase by $30 million

so smallest possible amount money supply increase is $30 million