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The Federal Reserve conducts a $10 million open-market purchase of government bonds. If
Chapter 29, Problem 6(choose chapter or problem)
The Federal Reserve conducts a $10 million open-market purchase of government bonds. If the required reserve ratio is 10 percent, what is the largest possible increase in the money supply that could result? Explain. What is the smallest possible increase? Explain.
Questions & Answers
QUESTION:
The Federal Reserve conducts a $10 million open-market purchase of government bonds. If the required reserve ratio is 10 percent, what is the largest possible increase in the money supply that could result? Explain. What is the smallest possible increase? Explain.
ANSWER:Step 1 of 2
The Federal Reserve conducts a $10 million open-market purchase of government bonds. The required reserve ratio is 10 percent.
This is calculated as the inverse of the reserve ratio. The money multiplier tells us the maximum possible change in the money supply following a change in the base money.