Question

Suppose the Federal Reserve increases the amount of reserves by $100 million and the total money supply increases by $500 million.

a. What is the money multiplier?
b. Using the money multiplier from part a, how much will the money supply change if the Federal Reserve increases reserves by $50 million?

Answer 1

Answer:

a.  The money multiplier is 5.

b. The Total money supply will increase by $250 million.

Explanation:

According to the given data we have the following:

Increase in amount of reserves by Fed = $100 million

Increase in money supply = $500 million

Therefore to Calculate the Money multiplier we have to use the following equation:

Increase in money supply = Increase in reserves×Money multiplier

So, Money multiplier = Increase in money supply/Increase in reserves

                                  = $500 million/$100 million

                                 = 5

a.  The money multiplier is 5.

If there is anIncrease in amount of reserves by Fed = $50 million  and the Money multiplier = 5 , therefore to Calculate increase in money supply we calculate the following:

Increase in money supply = Increase in amount of reserves by Fed * Money multiplier

                                            = $50 million  

                                           = $250 million

b. The Total money supply will increase by $250 million.