If the required reserve ratio is 20 percent and the Fed buys a $10,000 security from a depository institution that currently has no excess reserves,what happens to the money supply,using the simple multiplier?

Question

Quizplus · Accepted Answer

The simple money multiplier is calculated as 1 divided by the reserve ratio, which in this case is 1/0.20 = 5. When the Fed buys a $10,000 security, it increases the reserves by $10,000, which can be multiplied by the money multiplier (5) to increase the money supply by $50,000.

If the Required Reserve Ratio Is 20 Percent and the Fed