Assume that all money in the economy is deposited with banks and that banks hold no excess reserves. If the Federal Reserve buys $25 million worth of Treasury securities and the money supply increases by $250 million, then the reserve requirement is _____ percent.

Question

Quizplus · Accepted Answer

The money supply increased by $250 million as a result of the Federal Reserve buying $25 million worth of Treasury securities. This indicates a money multiplier effect of 10 ($250 million / $25 million = 10). The money multiplier is the reciprocal of the reserve requirement ratio (1/Reserve Requirement = Money Multiplier). Therefore, if the money multiplier is 10, the reserve requirement ratio is 1/10, or 10%.

Assume That All Money in the Economy Is Deposited with Banks