If the required reserve ratio is 10 percent and the Fed buys a $5,000 security from a depository institution,what happens to the money supply,using the simple multiplier?

Question

Quizplus · Accepted Answer

If the required reserve ratio is 10 percent, then the simple multiplier is 1/0.1 = 10. This means that for every $1 increase in reserves, the money supply will increase by $10.

If the Fed buys a $5,000 security from a depository institution, this increases the reserves of the institution by $5,000. Using the simple multiplier, we can see that the money supply will increase by $5,000 x 10 = $50,000. Therefore, the correct answer is D - the money supply increases by $50,000.

If the Required Reserve Ratio Is 10 Percent and the Fed