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Since October 2008, the Federal Reserve has paid interest on excess reserves held by banks. Under these circumstances, if the Fed buys Treasury securities worth $300 million from a bank, how will the money supply be affected? Assume that the required reserve ratio is 10% and that all currency is deposited into the banking system.
A. The money supply will increase by less than $3 billion,
B. The money supply will increase by $3 billion
C. The money supply will not change at all
D. The money supply will increase by more than $3 billion

Sagot :

The statement "the money supply should increase by lower of $3 billion is correct.

The calculation is shown below:

Reserve requirement should be

= 10% of 3 million

= 0.3 million  

Now  

Excess reserve should be

= 3 - 0.3

= 2.7 million

Since  Required reserve ratio = 10%

Now  

Money multiplier is

= 1 ÷ Required reserve ratio

= 1 ÷ 0.10

= 10

So,

Increase in money supply should be

= 2.7 million × 10

= $2.7  billion.

So, the rest of the options should be incorrect.

Therefore we can conclude that the statement "the money supply should increase by lower of $3 billion is correct.

Learn more about the money supply here: brainly.com/question/1099440

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