The Fed makes an open market operation purchase of $200,000. The currency drain ratio is 33.33 percent and the desired reserve ratio is 10 percent. By how much does the quantity of money increase?
A)$800,000
B)$333,333
C)$2,000,000
D)$618,604
E)$465,116

Question

Quizplus · Accepted Answer

The quantity of money will increase by the amount of the open market operation purchase, which is $200,000. However, we must adjust for the currency drain ratio and desired reserve ratio.

33.33% of the $200,000 will be held as currency, which means that only 66.67% will be deposited into bank reserves.

66.67% of $200,000 = $133,334

The desired reserve ratio is 10%, which means that only 90% of the $133,334 will be used to create new loans and deposits.

90% of $133,334 = $119,999.

Therefore, the quantity of money increases by $119,999.

Choice D is the only option that matches this answer.

The Fed Makes an Open Market Operation Purchase of $200,000