Reference no: EM132210337
Question: The Federal Reserve buys $5,000 in bonds from Fidelity, which then deposits the money in a checking account at Chase Morgan Bank.
(a) As a result of the Federal Reserve's action, what is the change in the money supply if the required reserve ratio is 100 percent?
The change in the money supply would be $0, as the reserve requirement is 100%. The bank would be required to hold the entire $5,000 in its reserves, not allowing it to be used as loanable funds.
(b) If the required reserve ratio is reduced to 20 percent, calculate the following.
(i) The maximum dollar amount this bank could lend from this deposit
(ii) The maximum increase in the total money supply that will be generated from total change in demand deposits from the Federal Reserve's purchase of bonds
(c) If the bank decides to keep 10% of the deposit as excess reserves, now what will be the change in the money supply?
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