Question

Suppose the Fed bought $150 million of U.S. securities from the public. The reserve requirement is 20 percent, and there are no initial excess reserves. A few weeks later, if the public's holdings of currency are constant and the banks have loaned all excess reserves, the money supply will increase by

Answer 1

Answer: $750 million

Explanation:

From the question, we re informed that

the Fed bought $150 million of U.S. securities from the public and that the reserve requirement is 20 percent. It should be noted that there will be an increase in the bank reserves by $150 million.

Money multiplier = 1/reserve requirement = 1/20% = 1/0.2 = 5

The increase in the money supply will be the excess reserves created multiplied by the multiplier. This will be:

= $150 million × 5

= $750 million

Therefore, the money supply will increase by $750 million