Assume we know that D = 900 r = 10% C = 500 ER = 7...
Assume we know that
D = 900
r = 10%
C = 500
ER = 7
If the Fed buys $350 worth of securities by how much will the overall money supply increase in the economy?
Homework Answers
The change in money supply can be calculated as:
Change in Money Supply = Money Multiplier (M1) x Change in Monetary Base
Here, Change in Monetary Base = $ 350 .....Given
We need to calculate the Money Multiplier using the below mentioned formula:
M1 = [1 + (C/D)] / (R + ER/D + C/D)
Where, C = Currency in Circulation = 500 .....Given
R = Reserve Ratio = 10% .....Given
D = Deposits = 900 .....Given
ER = Excess Reserves = 7 .....Given
Using this formula and the values mentioned above, lets calculate M1
M1 = [1 + (500/900)] / (10% + 7/900 + 500/900)
M1 = [1+0.55] / (0.1 + 0.0077 + 0.55)
M1 = 1.55 / 0.6633
M1 = 2.345
Using this, M1 & the Change in Monetary Base given as $350, we can calculate the change in Monetary Supply.
Change in Money Supply = Money Multiplier (M1) x Change in Monetary Base
Change in Money Supply = 2.345 x 350
Change in Money Supply = $820.77 ....Answer
Overall money supply increase in the economy is $820.77.
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