Q 27 Suppose the reserve ratio is 5 percent and the Fed sells $1.5 million worth
ID: 1165060 • Letter: Q
Question
Q 27
Suppose the reserve ratio is 5 percent and the Fed sells $1.5 million worth of bonds to the public. Then bank reserves
increase by $1.5 million and the money supply will eventually increase by $7.5 million.
decrease by $1.5 million and the money supply will eventually decrease by $7.5 million.
increase by $1.5 million and the money supply will eventually increase by $30 million.
decrease by $1.5 million and the money supply will eventually decrease by $30 million.
a.increase by $1.5 million and the money supply will eventually increase by $7.5 million.
b.decrease by $1.5 million and the money supply will eventually decrease by $7.5 million.
c.increase by $1.5 million and the money supply will eventually increase by $30 million.
d.decrease by $1.5 million and the money supply will eventually decrease by $30 million.
Explanation / Answer
Given that the required reserve ratio is 5 percent. This implies that multiplier is 1/0.05 = 20. Fed sells $1.5 million worth of bonds to the public so bank reserves are initially decreased by 1.5 million and money supply decreases by 1.5 million x 20 = 30 million. Select Option D
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