Suppose the Fed decides it needs to pursue an expansionary policy. Assume people hold no cash, the reserve requirement is 10 percent, and there are no excess reserves. Show how the Fed would increase the money supply by $3 million through open market operations. Instructions: Enter numeric responses as whole numbers. Because the current money multiplier is, the Fed would $ worth of bonds, the monetary base and so increasing the money supply by $3 million.

Question

Johnathon Sawyer

Business

18 April, 08:57

Suppose the Fed decides it needs to pursue an expansionary policy. Assume people hold no cash, the reserve requirement is 10 percent, and there are no excess reserves. Show how the Fed would increase the money supply by $3 million through open market operations. Instructions: Enter numeric responses as whole numbers. Because the current money multiplier is, the Fed would $ worth of bonds, the monetary base and so increasing the money supply by $3 million.

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Answers (1)

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Peter Avila · Answer 1

Answer: The Fed would by $ 300 000 worth of bonds

Explanation:

Money multiplier calculates how much an initial deposit could increase money supply

Money Multiplier = (1/reserve ratio)

Money Multiplier = 1/0.10 = 10

meaning each $1 would increase money supply by $10

The Fed wants to increase the Money Supply by $ 3 million

$1 dollar increases money supply by $10, therefore The Fed would by $300 000 worth of bonds in the open markets. that is $3 million divided by the multiplier, 3000000/10.

the monetary base will increase by $3000 000