Suppose the Fed makes an open market purchase of $3 million. Assume that the reserve ratio is 10% and the money multiplier equals 10. What is the change in the money supply?

1 Answer
Jun 20, 2018

Answer:

Based on my understanding (it's been awhile since I studied economics) the change is money supply is #$3# million.

Explanation:

As I recall

  • The reserves are a portion of the balance banks must have on hand as cash. A #10%# reserve ratio on #$3# million open market purchase would imply #$0.3# million would need to be added to the reserves.
  • The change in money supply is calculated as the change in reserves times the money multiplier. In this case, with a money multiplier of #10#, the change in money supply would be #$0.3# million times #10# or #$3# million.