Assume that individuals hold no cash and banks hold no excess reserves. The Federal Reserve buys $500 worth of government securities from a bank, and the reserve requirement on banks is 5 percent. In this case, the money multiplier is _____, and the overall increase in money supply because of Federal Reserve's action will be:

Question

Quizplus · Accepted Answer

The money multiplier is calculated as 1 divided by the reserve requirement ratio, which is 1/0.05 = 20. The overall increase in the money supply is the product of the money multiplier and the initial amount of securities purchased, which is 20 * $500 = $10,000.

Assume That Individuals Hold No Cash and Banks Hold No