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Answer on Macroeconomics Question for Helen K.

Question #38089
Assume that the banking system is loaned up and that any open-market purchase by the Fed directly increases reserves in the banks. If the required reserve ratio is 0.2, by how much could the money supply expand if the Fed purchased $2 billion worth of bonds?
Expert's answer
RRR (Required Reserve Ratio) = 0.2
Thus, DM (Deposite Multiple) = 1/RRR = 5
and expansion will be $2 billion*DM = $10 billion

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Assignment Expert
03.08.2016 11:28

Dear David,

thank you! Answer is corrected.

03.08.2016 10:14

Unfortunately, I believe the provided answer is incorrect. In order to determine the potential expansion in the money supply, you would take the amount injected into the system by the Fed via its bond purchase and multiply it by the deposit multiplier $2 billion * (1/0.2) which equals $10 billion.

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