Suppose an economy uses a monetary system of chequable deposits only and it has a required reserve ratio of 20%.If the central bank in this economy conducts an open-market purchase of $5 million of Treasury bills,this will potentially _____ the money supply by _____.

Question

Quizplus · Accepted Answer

An open-market purchase of $5 million with a reserve ratio of 20% increases the money supply by $25 million due to the money multiplier effect, which is 1 divided by the reserve ratio (1/0.20 = 5). Thus, $5 million * 5 = $25 million.

Suppose an Economy Uses a Monetary System of Chequable Deposits