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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 conducts an open market purchase of $10 million worth of securities from a bank. If the required reserve ratio is nine percent, what is the resulting change in checkable deposits (or the money supply) if we assume there are no cash leakages and banks hold zero excess reserves?

To determine

The change in money supply.

Explanation

When Fed purchases securities, it increases the reserves of the Fed. This increase in total reserves (ΔR) is $ 10 million and the required ratio (r) is 9 percent.

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

Change in money supply=1r×(Δ

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