If the Federal Reserve purchases $1 billion dollars of government securities, how much does M1 increase...
If the Federal Reserve purchases $1 billion dollars of government securities, how much does M1 increase if the required reserve ratio is 50% and banks do not hold excess reserves?
A) $0.5 billion
B) $1 billion
C) $2 billion
D) $5 billion
Homework Answers
Answer
Multiplier =1/reserve ratio =1/0.5=2
change in M1=multiplier *amount of purchase of government securities
=2*1
=$2 billion
The M1 increases by $2 billion.
option C
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