Question

Suppose that the Federal Reserve purchases a bond for $100,000 from Reggie Rich, who deposits the proceeds in the Manufacturer’s National Bank.Initially, as a result of this bond purchase, the money supply will by$.Suppose the required reserve ratio is 25%.As the result of Rich’s deposit, Manufacturer’s Bank will be able to extend$in additional loans.As a result of this purchase by the Fed, the maximum increase in the quantity of checkable deposits that could result throughout the entire banking system is$

Answer 1

Answer:

1. Money supply increase by $100,000 because federal reserve purchase bond of $100,000 from Riggie Rich.

2. Increase in additional loans = Deposits - Reserve Required Ratio

Increase in additional loans = $100,000 - $100,000*25%

Increase in additional loans = $100,000 - $25,000

Increase in additional loans = $75,000

As a result of Rich' s deposits, Manufacturers Bank will able to extend $75,000 in additional loans.

3. Increase in Deposits = Change in Reserve x 1 / RRR

Increase in Deposits = $100,000 * 1/25%

Increase in Deposits = $100,000 * 1 / 0.25

Increase in Deposits = $4,000,000

As a result of this purchase by the fed, the maximum increase in the quantity of checkable deposits that could result through out the entire banking system is $4,000,000