Question

Assume that the Federal Reserve establishes a minimum reserve requirement of 12 ½ %. Also assume the Federal Reserve conducts an Open Market Operations purchase of U.S. Treasury securities in the amount of $1,000,000. The seller of the U.S. Treasury securities deposits the $1,000,000 into his account at Citibank. By what dollar amount could the money supply potentially grow from these transactions? Show your work.

Answer 1

Answer:

The amount of money that the supply could potentially grow from these transactions is $8,000,000

Explanation:

Reserve requirement ratio = 12.5%

Multiplier = 1/rrr = 1/12.5% = 8

Total deposits = $1,000,000

Then, the increase in money supply = multiplier*deposits

                                                             = 8(1,000,000)

                                                             = $8,000,000

Therefore, The amount of money that the supply could potentially grow from these transactions is $8,000,000