Assume that the reserve requirement is 5 percent. All other things equal, will the money supply expand
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Question:
Assume that the reserve requirement is 5 percent. All other things equal, will the money supply expand more if the Federal Reserve buys $2,000 worth of bonds or if someone deposits in a bank $2,000 that they had been hiding in their cookie jar? Explain.
Money Multiplier:
Money multiplier refers to the increase in aggregate supply given one dollar increase in monetary base. In a multiple deposits systems, the multiplying effect is a result of partial reserve requirement. If the required reserve ratio is r , the money multiplier could be as large as 1/ r .
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