Answered

Engage with knowledgeable experts and get accurate answers on IDNLearn.com. Ask anything and receive well-informed answers from our community of experienced professionals.

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

View image Andromache
Thank you for using this platform to share and learn. Keep asking and answering. We appreciate every contribution you make. Accurate answers are just a click away at IDNLearn.com. Thanks for stopping by, and come back for more reliable solutions.