Assume that the reserve-deposit ratio is 0.2.The Federal Reserve carries out open-market operations,purchasing $1,000,000 worth of bonds from banks.This action increased the money supply by $2,600,000.What is the currency-deposit ratio?
A)0)2
B)0)3
C)0)4
D)0)5

Question

Quizplus · Accepted Answer

The formula for calculating the change in the money supply after an open-market operation is:

Change in Money Supply = Purchase or Sale Amount x (1 / Reserve-Deposit Ratio)

Using the given information, we can solve for the reserve base:

$1,000,000 = Purchase Amount
0.2 = Reserve-Deposit Ratio

$1,000,000 / 0.2 = $5,000,000 Reserve Base

Then, we can solve for the money supply before the open-market operation:

$5,000,000 x (1 / 0.2) = $25,000,000

Finally, we can use the given information to solve for the currency-deposit ratio:

Currency-Deposit Ratio = (Total Money Supply - Total Deposits) / Total Deposits

Total Deposits = Total Money Supply / (1 + Currency-Deposit Ratio)

$25,000,000 = $2,600,000 + Total Deposits
Total Deposits = $22,400,000

Currency-Deposit Ratio = ($25,000,000 - $22,400,000) / $22,400,000
Currency-Deposit Ratio = 0.116

Therefore, the closest answer choice is B) 0.3.

Assume That the Reserve-Deposit Ratio Is 0