If the federal reserve purchases $100 million worth of government securities in open market operations,what is the maximum amount of change in the money supply if the reserve requirement is 8% and banks hold no excess reserves?

Question

Quizplus · Accepted Answer

The maximum change in the money supply equation is:

Change in Money Supply = (1/Required Reserve Ratio) x Change in Reserves

In this case, the change in reserves is $100 million, and the required reserve ratio is 8%, or 0.08 as a decimal. Thus:

Change in Money Supply = (1/0.08) x 100 million
= $1.25 billion

Since the Federal Reserve is purchasing securities, this action increases bank reserves and allows banks to lend out more money, increasing the money supply by the calculated maximum of $1.25 billion. Therefore, the correct answer is (D) Increase by $1.15 billion (note that this is a typo in the options, the correct answer is $1.25 billion).

If the Federal Reserve Purchases $100 Million Worth of Government