Suppose the Fed conducts an open market sale of $50 million in government securities. If the required reserve ratio is 20%, what is the maximum change in the money supply? Assume that banks try not to hold excess reserves and there is no currency withdrawal from the banking system.

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Alfredo Camacho

18 April, 10:53

Suppose the Fed conducts an open market sale of $50 million in government securities. If the required reserve ratio is 20%, what is the maximum change in the money supply? Assume that banks try not to hold excess reserves and there is no currency withdrawal from the banking system.

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Lynx · Answer 1

The maximum change in the money supply is 250 million

Explanation:

In this question, we are asked to calculate the maximum change in money supply given that the required reserve ratio is 20%.

Firstly, we need to calculate the multiplier in this case.

The multiplier in this case can be calculated by dividing 1 by the required reserve ratio

Mathematically, multiplier = 1/required reserve ratio = 1/0.2 = 5 (kindly note that 20/100 = 0.2)

Now, we move on to calculate the maximum change in the money supply.

This would be equal to multiplier * value of open market sale = 5 * 50 million = 250 million

Therefore, the maximum change in the money supply is 250 million