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27 June, 15:19

The balance sheet below reflects Zee Bank after its purchase of $65 million in government securities from the Fed. Assume a required reserve ratio of 10%, that banks hold no excess reserves, and that all currency is deposited into the banking system.

Assets Liabilites and net worth Reserves $15 million Liabilities: Checking Deposits $150 million Loans $275 million Net Worth $205 Treasuries $65 million

How did the purchase of $65 million in government securities from the Fed affect the money supply? Choose one:

A. The money supply increased by $65 million.

B. The money supply increased by $650 million.

C. The money supply decreased by $650 million.

D. The money supply decreased by $65 million.

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Answers (1)
  1. 27 June, 15:29
    0
    Option (C) is correct.

    Explanation:

    The money multiplier = 1 : reserve ratio

    = 1 : 0.1

    = 10

    If a bank purchases $65 million of government securities from the Fed then this will reduce the money supply in the economy because the money from the bank is going.

    The decrease in money supply:

    = purchase amount * money multiplier

    = 65 * 10

    = 650 million
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