Question
Asked Mar 15, 2019
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Suppose the Federal Reserve (Fed) decides the current money supply of $2.1 trillion is too low, and that an increase of $400
billion is necessary.
What tool can the Fed use to accomplish this increase? Assume the current reserve ratio is 0.1
OIncrease the reserve ratio.
O Buy government securities.
Increase the interest paid on bank reserves.
Sell government securities.
Calculate the change in reserves necessary to achieve the $400 billion increase
billion
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Suppose the Federal Reserve (Fed) decides the current money supply of $2.1 trillion is too low, and that an increase of $400 billion is necessary. What tool can the Fed use to accomplish this increase? Assume the current reserve ratio is 0.1 OIncrease the reserve ratio. O Buy government securities. Increase the interest paid on bank reserves. Sell government securities. Calculate the change in reserves necessary to achieve the $400 billion increase billion

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Expert Answer

Step 1

Money multiplier:

Under the fractional reserve banking system money multiplier is the tool which measures the maximum amount that commercial banks of a country can create with the given certain amount of central bank money.

Step 2

Fed can “buy back Government securities” from the persons or institution who are holding it. This process will inject the money in the economy and as a result money supply will increase. An increase in “interest rate on bank reserve” will give more money in the bank’s hand and these banks can use for further lending or money creation.

Step 3
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