Answer to Question #51342 in Macroeconomics for oswald

Question #51342
Respond to the following question (one well composed paragraph for each question): Suppose the Fed sells $5 million worth of bonds to Econobank. What happens to the reserves of the bank? What happens to the money supply in the economy as a whole if the reserve requirement is 10%, all payments are made by check, and there is no net drain into currency? How would your answer in part b be affected if you knew that some people involved in the money creation process kept some of their funds as cash?
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Expert's answer
2015-03-14T09:50:04-0400
If the Fed sells $5 million worth of bonds to Econobank, then the reserves of the bank will increase.
The money supply in the economy as a whole will increase by 5/0.1 = $50 million, if the reserve requirement is 10%, all payments are made by check, and there is no net drain into currency.
The answer in part b will change and the increase in money supply will be lower if some people involved in the money creation process kept some of their funds as cash.

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