Question

The Federal Reserve conducts a $15 million open-market purchase of government bonds. If the required reserve ratio is 20 percent, the largest possible increase in the money supply that could result is $ ................. million, and the smallest possible increase is $ .....................million.

Answer 1

Answer:

$200 million

$30 million

Explanation:

When the requiredreserce ratio is 15 percent or 0.15 , then the money multiplier is (1 / required reserve ratio) or (1/0.15 = 0.67)

Now, change in money supply = money multiplier * open market purchase of government bonds.

Here , the Federal Reserve a $30 million open market purchase Of govemment bonds.

As a result of this;

Money Supply increases by (6.7 * $30 million) = $200 million.

This is the maximum amount the money supply could Increase.

Now, if the bank holds. $30 million as excess reserves, then money supply could increase by as much as $30 million. This is the smallest amount themoney supply could increase.

So, If the required reserve ratio is 15 percent the largest possible increase in the money supply that could result is $200 million- and the smallest possible increase is $30 million.