Suppose that the reserve requirements are 10 percent and that the Federal Reserve purchases $2 billion in securities from a brokerage firm on a given day. a. How will this transaction affect the M1 money supply? b. If the brokerage firm that sold the bonds to the Fed deposits the proceeds of the sale into its account with Nation’s Bank, what is the maximum amount of additional loans that Nation’s Bank will be able to extend as a result of this deposit? c. If additional loans are extended throughout the banking system and the proceeds are always redeposited back into a checking account, by how much will the M1 money supply increase if banks use all their additional reserves to extend new loans?

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Economics: Private and Public Choi...

16th Edition
James D. Gwartney + 3 others
Publisher: Cengage Learning
ISBN: 9781305506725
BuyFind

Economics: Private and Public Choi...

16th Edition
James D. Gwartney + 3 others
Publisher: Cengage Learning
ISBN: 9781305506725

Solutions

Chapter
Section
Chapter 13, Problem 18CQ
Textbook Problem

Suppose that the reserve requirements are 10 percent and that the Federal Reserve purchases $2 billion in securities from a brokerage firm on a given day.

  1. a. How will this transaction affect the M1 money supply?
  2. b. If the brokerage firm that sold the bonds to the Fed deposits the proceeds of the sale into its account with Nation’s Bank, what is the maximum amount of additional loans that Nation’s Bank will be able to extend as a result of this deposit?
  3. c. If additional loans are extended throughout the banking system and the proceeds are always redeposited back into a checking account, by how much will the M1 money supply increase if banks use all their additional reserves to extend new loans?

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