Question

11 1x reserve requirement A c M 1 Transaction $1,000 2 1 3 reau in ce loan 51.000 51.000.00 $900.00 $310.00 5729.00 56561 $$90.43 5531.46 $478.30 $430.47 $187 42 $140.6 5311.30 5 6 7 G H percento Terve deposited Deposit Resverato requirement $1,000.00 100.00% 51.0000000 10% 31000000 $900.00 100.COM So 0000 10 ON 550.0000 5810.00 100 OON 5810.000 10.ON $81.000 5729.00 100 ON 5719 0000 10.0N $729000 565610 100.00 36561000 10.0N 5656100 $590.49 100.00 $520 4900 10 ON $59.0490 $531.44 100.00% $11.4410 10.ON 553.1441 $478.30 100 OOK 54782059 10.ON 547 3297 $430.47 100 DON $410.4672 10.ON $43 0467 $38742 100 SON SIRAS 10.0 538 7410 SHUB 100 DON SHER.6734 10.1 5345678 5313:51 100 OON $313.8106 10.0% 5313811 $6.851 8140 2 9 10 11 9 10 11 14 Creation of 16 17 Open market operation of $1,000 (cell b2) leads to an increase in bank reserves of $1,000 (cell C2). Excess reserves are assumed to increase by $1,000 (cel D2). The bank lends out the 20 21 Increase in excess reserves (cel E2). The borrower deposits the loan into a checking account at bank for use in business. (ools F2 and 2). The Federal Reserve sets the reserve ratio col H2). The reserve requirement is the reserve ratio multiplied by the increase in deposits (ool 12) 22 23 Since the bank must only hold a fraction of the deposit on reserve it is free to lend out the excess (coil D3). 24 The process is now in moson. The initial increase in reserves is loading to a multiplier offect on deposits which are part of the money supply. 25 * Each deposit column lead to an increase in excess reserves (column D) that leads to another loan (column E). The sum of the loans created in the increase in the money supply set- 30

If the Open Market Purchase is $1 billion by approximately how much will the supply of Money increase? Use my attached sheet to answer this. How does your answer change if the reserve requirement is lowered to 0%?

Answer 1

Answer -

Reserve ratio = 10 %

Money multiplier = 1/reserve ratio

= 1/0.10

= 10

Increase in money supply = $ 1 billion * 10

= $ 10 billion

This money supply will be created by open market purchase.

If the reserve requirement will be 0% , then the value of multiplier cannot be defined. Thus , in that case we will not be able to find out the exact value of the increase in money supply by open market purchase.