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Economics (MindTap Course List)

13th Edition
Roger A. Arnold
ISBN: 9781337617383

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BuyFindarrow_forward

Economics (MindTap Course List)

13th Edition
Roger A. Arnold
ISBN: 9781337617383
Textbook Problem

Suppose the Fed sells $30 million worth of securities to a bank. If the required reserve ratio is 10 percent, what is the resulting change in checkable deposits (or the money supply) if we assume no cash leakages and banks hold zero excess reserves.

To determine

The change in money supply.

Explanation

When Fed sells securities, it decreases the reserves of the Fed. This decrease in total reserves (ΔR) is $ 30 million and the required ratio (r) is 10 percent.

The change in money supply can be calculated by substituting the respective vales in Equation (1) as follows:

Change in money supply=1r×(ΔR

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