Assume the desired reserve ratio is 10 percent,banks loan all excess reserves and the currency drain is zero.If the Fed sells $100 million of U.S.government securities to Boise Bank,the monetary base increases by

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When the Fed sells $100 million of U.S. government securities to Boise Bank, the monetary base would increase by the same amount, which is $100 million. This is because the monetary base is equal to the sum of currency in circulation and reserves held by banks, and when the Fed sells securities, reserves held by banks decrease while currency in circulation does not change, resulting in a net increase in the monetary base. Since the desired reserve ratio is 10 percent, banks would have to hold $10 million of the $100 million as reserves, leaving $90 million as excess reserves. If banks loan all excess reserves and the currency drain is zero, the money multiplier would be 1/required reserve ratio, which is 1/0.1 or 10. Therefore, the initial increase in the monetary base of $100 million would eventually result in a $1 billion increase in the money supply (10 x $90 million).

Assume the Desired Reserve Ratio Is 10 Percent,banks Loan All