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Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985

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BuyFindarrow_forward

Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985
Textbook Problem

The Fed conducts a $10 million open-market purchase of government bonds. If the required reserve ratio is 10 percent, what are the largest and smallest possible increases in the money supply that could result? Explain.

To determine

The purchase of bonds by the Fed and the impact on money supply.

Explanation

The Federal Reserve is the central bank of the US economy, and it is usually known as the Fed. The Fed has the responsibility of keeping the economy controlled from the fluctuations, and has to control the money supply of the economy through its monetary policies. When the purchase of the government bonds from the public takes place, it will provide the money to the public, which will increase the consumption in the economy. As a result of the multiplier effect, the money supply in the economy will increase by the multiplier times.

Here, when the required reserve ratio is 10 percent, the money multiplier can be calculated as follows:

Money multiplier=1Reserve ratio=10.10=10

Therefore, the value of the money multiplier in the economy is 10

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