If the Federal Reserve wishes to increase the money supply by $30,000 and the reserve requirement ratio is 0.4,how big a purchase of bonds will the Fed need to make?

Question

Quizplus · Accepted Answer

The formula to calculate the potential increase in the money supply is: 
Potential Increase in Money Supply = Change in Reserves / Reserve Requirement Ratio

Plugging in the given information, we get: 
$30,000 = Change in Reserves / 0.4

Solving for the change in reserves: 
Change in Reserves = $30,000 x 0.4 = $12,000

Therefore, the Fed will need to make a purchase of bonds worth $12,000 to increase the money supply by $30,000, assuming a reserve requirement ratio of 0.4.

If the Federal Reserve Wishes to Increase the Money Supply