Suppose the Fed makes an open market purchase of $3 million. Assume that the reserve ratio is 10% and the money multiplier equals 10. What is the change in the money supply?
1 Answer
Jun 20, 2018
Based on my understanding (it's been awhile since I studied economics) the change is money supply is
Explanation:
As I recall
- The reserves are a portion of the balance banks must have on hand as cash. A
10% reserve ratio on$3 million open market purchase would imply$0.3 million would need to be added to the reserves. - The change in money supply is calculated as the change in reserves times the money multiplier. In this case, with a money multiplier of
10 , the change in money supply would be$0.3 million times10 or$3 million.
