posted by jill .
Am i right, just checking as too many wrong homework assignments at the start of this semester have messed up my grades
If the required reserve ratio is 0.2, by how much could the money supply expand if the central bank purchased £2 billion worth of bonds?
2.0 billion x 0.20 = 400 million to be held in reserve, which means that the money supply increases by, 1.6 billion.
The money multiplier is 1/required reserve ratio. So .2=1/5. The money multiplier is 1/(1/5)=5.
So money will expand by 2B X 5 = 10 Billion