Assume that individuals hold no cash and banks hold no excess reserves. The Federal Reserve buys $100 worth of Treasury securities from a bank, and the money supply increases by $500. In this case, the money multiplier is _____, and the reserve requirement is _____ percent.

Question

Quizplus · Accepted Answer

The money multiplier is calculated as the increase in money supply divided by the initial change in reserves, which is $500/$100 = 5. The reserve requirement is the reciprocal of the money multiplier, so 1/5 = 0.20 or 20%.

Assume That Individuals Hold No Cash and Banks Hold No