Question

18. Open Market Operations and the Money Multiplier Suppose that the reserve requirement for checking deposits is 10 percent and that banks do not hold any excess reserves. If the Fed sells $1 million of government bonds, the economy’s reserves increase by $100 million, and the money supply will increase by $9 million. Now suppose the Fed lowers the reserve requirement to 5 percent, but banks choose to hold another 5 percent of deposits as excess reserves. This will the money multiplier, and it will the money supply.

Answer 1

Answer

The answer and procedures of the exercise are attached in the following image.  

Explanation  

Please consider the data provided by the exercise. If you have any question please write me back. All the exercises are solved in a single sheet with the formulas indications.