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alexdok [17]
3 years ago
8

Suppose the Fed purchases $100 million of U.S. securities from security dealers. If the reserve requirement is 20 percent, the c

urrency holdings of the public are unchanged, and banks have zero excess reserves both before and after the transaction, the total impact on the money supply will be a:A.$100 million increase in the money supply.B.$100 million decrease in the money supply.C.$200 million increase in the money supply.D.$500 million increase in the money supply.
Business
1 answer:
VikaD [51]3 years ago
7 0

Answer:

The correct answer is option D.

Explanation:

The reserve requirement is 20 percent.

The Fed purchases $100 million of U.S. securities from security dealers.

The excess reserves with banks are zero.  

When fed purchased securities, this open market operation increased the reserves with banks by $100 million.  

The increase in money supply  

= \frac{1}{RR}\times Change\ in\ reserves

= \frac{1}{0.2}\times 100

= 500

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