Assume that the required reserve ratio is 20 percent. What is the total possible expansion of the money supply after a $ 400,000 bond purchase by the Fed?$---
The required reserve ratio is 20 percent, which means that banks are required to hold 20 percent of their deposits as reserves.
If the Fed purchases a $400,000 bond, that money will enter the banking system as reserves. The banks will then be required to hold 20 percent of these reserves, which would be $80,000.
The remaining $320,000 can be lent out by the banks, which will eventually enter the money supply as new deposits.
Therefore, the total possible expansion of the money supply would be $320,000.
wrong answer. You need to use the following relationship:
(money multiplier) *deposit = potential change in the money supply. Where the money multiplier=1/required reserve ratio= 1/0.20=5.0
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Apologies for the confusion.
Using the given relationship, where the money multiplier is 1/required reserve ratio, we can calculate the potential change in the money supply.
1/0.20 = 5.0
Therefore, the money multiplier is 5.0.
To determine the potential change in the money supply, we multiply the money multiplier by the initial deposit made by the Fed:
$400,000 * 5.0 = $2,000,000
Thus, the total possible expansion of the money supply after the $400,000 bond purchase by the Fed is $2,000,000.
To determine the total possible expansion of the money supply after a $400,000 bond purchase by the Federal Reserve (Fed), we need to incorporate the concept of the required reserve ratio.
The required reserve ratio is the percentage of deposits that banks are required to hold in reserve, meaning they cannot lend out this portion. In this case, the required reserve ratio is stated as 20 percent.
Step 1: Calculate the reserves.
Reserves are the funds that banks are legally required to hold in reserve. We can find this by multiplying the bond purchase amount ($400,000) by the required reserve ratio (20% or 0.20).
Reserves = $400,000 x 0.20
Reserves = $80,000
Step 2: Determine the money multiplier.
The money multiplier, also known as the deposit multiplier, indicates the amount by which the money supply can be expanded through the lending process. The formula for the money multiplier is calculated as follows:
Money Multiplier = 1 / Reserve Ratio
In this case, the reserve ratio is 0.20, so the money multiplier would be:
Money Multiplier = 1 / 0.20
Money Multiplier = 5
Step 3: Calculate the total possible expansion of the money supply.
To determine the total possible expansion of the money supply, we multiply the reserves by the money multiplier.
Total Possible Expansion = Reserves x Money Multiplier
Total Possible Expansion = $80,000 x 5
Total Possible Expansion = $400,000
Therefore, the total possible expansion of the money supply after a $400,000 bond purchase by the Fed, with a required reserve ratio of 20 percent, would also be $400,000.
To determine the total possible expansion of the money supply, we need to understand the concept of the required reserve ratio and its relationship with the money multiplier.
The required reserve ratio is the percentage of deposits that banks are required to hold as reserves and not lend out. In this case, the required reserve ratio is 20%, which means that banks must keep 20% of any deposits they receive as reserves.
The money multiplier is the inverse of the required reserve ratio and represents the maximum amount by which the money supply can expand. It is calculated as 1 divided by the required reserve ratio.
In this case, the required reserve ratio is 20%, or 0.2, so the money multiplier is 1 divided by 0.2, which equals 5. This means that for every dollar of reserves held by the banks, they can lend out up to five times that amount.
Now, let's calculate the total possible expansion of the money supply after the $400,000 bond purchase by the Fed:
Step 1: Calculate the amount of reserves that banks must hold.
Reserves = Required Reserve Ratio × Deposits
Reserves = 0.2 × $400,000
Reserves = $80,000
Step 2: Calculate the potential expansion of the money supply.
Potential Expansion = Money Multiplier × Reserves
Potential Expansion = 5 × $80,000
Potential Expansion = $400,000
Therefore, the total possible expansion of the money supply after a $400,000 bond purchase by the Fed in this scenario is $400,000.