Assume that the reserve requirement is 25 percent.If the Federal Reserve buys $2,500 worth of bonds, the largest possible increase in the money supply is . If someone deposits in a bank $2,500 that she had been hiding in her cookie jar, the largest possible increase in the money supply is . True or False: All other things equal, the money supply will expand more if the Federal Reserve buys $2,500 worth of bonds than if someone deposits in a bank $2,500 that she had been hiding in her cookie jar. True False

Question
Asked Nov 10, 2019
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Assume that the reserve requirement is 25 percent.
If the Federal Reserve buys $2,500 worth of bonds, the largest possible increase in the money supply is
 
.
 
If someone deposits in a bank $2,500 that she had been hiding in her cookie jar, the largest possible increase in the money supply is
 
.
 
True or False: All other things equal, the money supply will expand more if the Federal Reserve buys $2,500 worth of bonds than if someone deposits in a bank $2,500 that she had been hiding in her cookie jar.
 
True
 
False
 
 
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Expert Answer

Step 1

Given- reserve ratio = 25% = 0.25

Money Multiplier = 1/reserve ratio = 1/0.25 = 4

a)If the Federal Reserve buys $2,500 worth of bonds,

The largest possible increase in the money supply is(M) = Multiplier * bonds worth

M = 4*2500 = $10000

Now current money supply = $10000

Step 2

If someone deposits in a bank $2,500 that she had been hiding in her cookie jar

Now, the largest possible increase in the money su...

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