Question

Suppose the Federal Reserve carries out an open market purchase and increases bank reserves by $160,000. Further suppose that reserve ratio is 10%. By how much is the money supply expected to change? Select one:

a. $1.6 million
b. $160,000
c. $320,000
d. $17.6 million

Answer 1

Answer:

a. $1.6 million

Explanation:

If bank reserves are increased by $160,000 and that the reserve to money supply ratio is 10% the increase in money supply is expected to be as follows:

$Increase\ in\ money\ supply=\frac{Increase\ in\ bank\ reserves}{reserve\ ratio}\\Increase\ in\ money\ supply=\frac{\ 160,000}{0.10}\\Increase\ in\ money\ supply= 1,600,000$

Therefore, an increase of $1,600,000 in money supply is expected.

The answer is a.