Question

For each of the following monetary policies, calculate the change in money supply.1. The Fed purchases $500 worth of bonds from banks and the required reserve ratio is 10%.2. The Fed sells $800 worth of bonds to banks and the required reserve ratio is 20%.3. The Fed purchases $3000 worth of bonds from banks and the required reserve ratio is 50%.4. The Fed makes $500 discount loans to banks. The required reserve ratio is 10%.5. The Fed lowers the required reserve ratio from 10% to 2%. The amount of bank reserves is $5 million.

Answer 1

Answer:

1. change in money supply= 500*10=$5000

2. change in money supply = 800*5 = $4000

3. change in money supply = 3000* 2= $6000

4. change in money supply = 500* 10 = $5000

5. change in money supply = 5,000,000*50 =$250,000,000

Explanation:

Change in money supply=  change in reserves* money multiplier

money multiplier = 1/ reserve ratio