Question

ssume the reserve ratio is 25 percent and Federal Reserve Banks buy $4 million of U.S. securities from the public, which deposits this amount into checking accounts. As a result of these transactions, the supply of money is:

Answer 1

Answer:

The supply of money is directly increased by $4 million and the money-creating potential of the commercial banking system is increased by an additional $12 million.

Explanation:

Total Money supply increased in question = $4 million + $12 million

Total Money supply increased in question = $16 million

Multiplier = 1 / Reserve Ratio

Multiplier = 1 / 0.25 = 54

Once the money is deposited, Money supply is increased by $4 Million.

Total money supply to be increased = Deposits * Multiplier

= 4 million * 4

= $16 Million