Suppose that the Federal Reserve buys $400 billion worth of government securities from the public. If the required reserve ratio is 20 percent, the maximum increase in the money supply is

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abiolataiwo2015 abiolataiwo2015 · Answer 1 · 2022-04-29T10:26:55+02:00

If the required reserve ratio is 20 percent, the maximum increase in the money supply is $2,000 billion.

First step

Multiplier=1/Reserve ratio

Multiplier=1/0.20

Multiplier=5

Second step

Increase in money supply=Multiplier×Federal reserve

Increase in money supply=5×$400

Increase in money supply=$2,000 billlion

Therefore If the required reserve ratio is 20 percent, the maximum increase in the money supply is $2,000 billion.

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