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 multiplier is 5. In this case, the reserve requirement on banks is _____ percent, and the total money supply in the economy will increase by:

Question

Quizplus · Accepted Answer

The money multiplier is the reciprocal of the reserve requirement ratio. If the money multiplier is 5, the reserve requirement is 1/5, which is 20%. The total money supply will increase by the initial amount multiplied by the money multiplier: $100 * 5 = $500.

Assume That Individuals Hold No Cash and Banks Hold No