The banking system currently has $200 billion of reserves,none of which are excess.People hold only deposits and no currency,and the reserve requirement is 4%.If the Fed raises the reserve requirement to 5% and at the same time buys $50 billion dollars of bonds,then by how much does the money supply change?
A)It rises by $1000 billion.
B)It rises by $1250 billion.
C)It falls by $950 billion.
D)None of the above is correct.

Question

Quizplus · Accepted Answer

The increase in reserve requirement reduces the money multiplier, while the Fed's bond purchase increases reserves. The net effect on the money supply depends on the interaction of these changes, and none of the given options correctly describe this complex interaction.

The Banking System Currently Has $200 Billion of Reserves,none of Which