Suppose that the Fed undertakes an open market purchase of $25 million worth of securities from a bank.If the required reserve ratio is 9%,what is the resulting change in checkable deposits (or the money supply),assuming that there are no cash leakages and that banks hold zero excess reserves?
A) $277.8 million
B) $225 million
C) $28 million
D) $34 million

Question

Quizplus · Accepted Answer

The resulting change in checkable deposits can be calculated using the money multiplier formula, which is 1/required reserve ratio. With a 9% reserve ratio, the multiplier is 1/0.09 = 11.11. Multiplying this by the $25 million initial injection gives a potential increase in the money supply of $25 million * 11.11 = $277.8 million.

Suppose That the Fed Undertakes an Open Market Purchase of $25