For each of the following monetary policies, calculate the change in money suppl

ID: 1118766 • Letter: F

Question

For each of the following monetary policies, calculate the change in money supply.

•The Fed purchases $500 worth of bonds from banks and the required reserve ratio is 10%.

•The Fed sells $800 worth of bonds to banks and the required reserve ratio is 20%.

•The Fed purchases $3000 worth of bonds from banks and the required reserve ratio is 50%.

•The Fed makes $500 discount loans to banks. The required reserve ratio is 10%.

•The Fed lowers the required reserve ratio from 10% to 2%. The amount of bank reserves is $5 million.

Money supply = change in reserves * Money multiplier

Money multiplier = 1 / Reserve Ratio

Change in reserves = Increase of $500

Money multiplier = 1 / 0.1 = 10

Change in money supply = $500 * 10 = $5000

Therefore, there will be an increase of $5000

Change in reserves = Decrease of $800

Money multiplier = 1 / 0.2 = 5

Change in money supply = $800 * 5 = $4,000

Therefore, there will be an decrease of $4,000

Change in reserves = Increase of $3,000

Money multiplier = 1 / 0.5 = 2

Change in money supply = $3,000 * 2 = $6,000

Therefore, there will be an increase of $6,000

Change in reserves = Decrease of $500

Money multiplier = 1 / 0.1 = 10

Change in money supply = $500 * 10 = $5000

Therefore, there will be an decrease of $5000

Change in reserves = $5 million

when resrve ratio = 10%

Money multiplier = 1 / 0.1 = 10

Change in money supply = $5 million * 10 = $ 50 million

when resrve ratio = 2%

Money multiplier = 1 / 0.02 = 50

Change in money supply = $5 million * 50 = $ 250 million

Therefore, there will be an increase of $200 million ( $250 - $50 = $200 million)

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