Suppose the required reserve ratio is 0.2,and the Fed buys $5,000 of U.S.government securities from Bank A,which lends $4,000 and keeps $1,000 in its vault as cash.In this round of the money-creation process,the M1 money supply has increased by:

Question

Quizplus · Accepted Answer

When the Fed buys $5,000 of U.S. government securities, the bank's reserves increase by $5,000. Bank A then lends out $4,000 and keeps $1,000 in its vault. The $4,000 loan increases the M1 money supply by $4,000, as it directly increases the amount of currency in circulation or in checking accounts.

Suppose the Required Reserve Ratio Is 0