Question

Suppose the money supply (as measured by checkable deposits) is currently $700 billion. The required reserve ratio is 25%. Banks hold $175 billion in reserves, so there are no excess reserves.
The Fed wants to increase money supply by $44 billion, to $744 billion. Assume that you can use the simple money multiplier
a) If the Fed wants to increase the money supply through open market operations, it should_ $_ billion worth of U.S. government bonds.
b) If the Fed wants to increase the money supply by adjusting the required reserve ratio, it should_required reserve ratio.

Answer 1

Answer:

a) Buy bonds worth 44$ billion

b) Decrease

Explanation:

a) If the Fed wants to increase the money supply through open market operations, it should Buy bonds worth 44$ billion of U.S. government bonds.

b) If the Fed wants to increase the money supply by adjusting the required reserve ratio, it should Decrease required reserve ratio.