Suppose the Fed purchases $200 million of U. S. securities from the public but the reserve requirement is now only 10 percent, the currency 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

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Imani Smith

Business

30 August, 18:07

Suppose the Fed purchases $200 million of U. S. securities from the public but the reserve requirement is now only 10 percent, the currency 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

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Jasmin Mueller · Answer 1

Therefore the supply of money is directly increased by the purchase of $200 million security and the money creating potential is increased by $2 billion

Explanation:

The money created = Initial deposit * (1/r - 1),

where r is the reserve requirement = 10% = 0.1 Initial deposit = $200 million.

Therefore: The money created = $200 million * (1/0.1 - 1) = $200 million * 9 = $1.8 billion.

Increase in money supply = $200 million + $1.8 billion = $2 billion

Therefore the supply of money is directly increased by the purchase of $200 million security and the money creating potential is increased by $2 billion