Question

The FOMC has instructed the FRBNY Trading Desk to purchase $480 million in U.S. Treasury securities. The Federal Reserve has currently set the reserve requirement at 4 percent of transaction deposits. Assume U.S. banks withdraw all excess reserves and give out loans. a. Assume also that borrowers eventually return all of these funds to their banks in the form of transaction deposits. What is the full effect of this purchase on bank deposits and the money supply

Answer 1

Answer:

$12 billion

Explanation:

Given that,

Treasury securities purchased = $480 million

Reserve requirement = 4% of the deposits

Therefore,

Increase in bank deposits and money supply:

$=\frac{1}{(rr)}\times Purchased\ amount$

$=\frac{1}{(0.04)}\times 480$

= 25 × $480 million

= $12,000 million

= $12 billion

Hence, there is an increase in the bank deposits and money by $12 billion.