If the required reserve ratio is 0.2,and the Fed buys $3,000 of U.S.government securities,the maximum amount by which the money supply can increase is:

Question

Quizplus · Accepted Answer

When the Fed buys $3,000 of U.S. government securities, this initial transaction increases the reserves of the banking system by $3,000. With a required reserve ratio of 0.2 (or 20%), banks are required to hold 20% of deposits as reserves and can lend out the remaining 80%. The money multiplier formula is 1/required reserve ratio, which in this case is 1/0.2 = 5. Therefore, the maximum increase in the money supply is $3,000 * 5 = $15,000.

If the Required Reserve Ratio Is 0