Assume that the currency-deposit ratio is 0.5.The Federal Reserve carries out open-market operations,purchasing $1 million worth of bonds from banks.This action increased the money supply by $2 million.What is the reserve-deposit ratio?
A)0)25
B)0)35
C)0)40
D)0)50

Question

Quizplus · Accepted Answer

The money multiplier is calculated as (1 + currency-deposit ratio) / (currency-deposit ratio + reserve-deposit ratio). Given the currency-deposit ratio is 0.5 and the money supply increased by $2 million from a $1 million purchase, the money multiplier is 2. Solving (1 + 0.5) / (0.5 + reserve-deposit ratio) = 2 gives a reserve-deposit ratio of 0.25.

Assume That the Currency-Deposit Ratio Is 0