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//ccc.blackboard.com/bbcswebdav/pid-76115 62-dt-content-rid-88969201_1/courses/1183 3291 Money Basics Economics 201- Due November 19, 2017-11:59pm Analysis Problems 6) Suppose the Federal reserve buys 1 million in Treasury securities from a commercial bank (increasing the money in circulation). Explain in detail (4 sentences or more) the effects of this action on the bank's reserves and the money supply? Use a required reserve ratio of 10%, and assume that banks hold no excess reserves and that all currency is deposited into the banking system (no savings).

Explanation / Answer

Purchasing of government securities will lead to increase in the amount of money supplied in the economy. It also increase the amount of required and excess reserves of the bank. If the required reserve ratio of the bank is 10 per cent, then purchasing of government securities will lead to increase in the amount of money supplied by 1/ Required reserve ratio of the bank.

Thus, increase in the amount of money supplied = 1/ .10 * 1 million = 10,000,000 thus money supply will increase by $10 million.

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