The reserve ratio is 20 percent. The Fed buys $1 million in government securities from a...

The reserve ratio is 20 percent. The Fed buys $1 million in government securities from a bond dealer by transmitting the funds to the dealer's deposit account at Bank A. Bank A makes the maximum loan possible to a construction company, which buys materials with the loan. The check is deposited in Bank B, which loans out all it can to a car dealership. To this point, the money supply has increased by.. A)$1 million B)$1.8 million C)$2.44 million D)$3 million.

Expert Solution

Fed has paid $1 million to the dealer.

Dealer has deposited $1 million at his deposit account with Bank A.

Reserve ratio is 20%.

Required reserves maintained by Bank A = $1 million * 0.20 = $200,000

Excess reserves created by new deposit = Deposit - Required reserves = $1 million - $200,000 = $800,000

Bank A loans out these entire excess reserves to a construction company.

Construction buys material with loan and pay by check which the supplier deposits into Bank B.

Deposit created at Bank B = $800,000

Required reserves to be maintained = $800,000 * 0.20 = $160,000

Excess reserves with bank = $800,000 - $160,000 = $640,000

These excess reserves were loaned out to a car dealership. When bank makes a loan, it opens a deposit account in the name of borrower.

So, upto this point, three times deposit has increased. Deposit accounts are part of money supply. So, money supply will increase by the amount of increase in deposits.

Increase in deposits = $1 million + $800,000 + $640,000 = $2.44 million

So, money supply will increase by $2.44 million.

Hence, the correct answer is the option (C).

Rahul Sunny answered 2 years ago

2a. The reserve requirement is 20% and the FED buys 200 billion dollars of government securities....

2a. The reserve requirement is 20% and the FED buys 200 billion dollars of government securities. What is the maximum expansion possible in the money supply? 2b. (30 points) Explain how the change in the money supply in question 2a works its way through the economy to affect employment, inventories, GDP, and interest rates. Be sure to explain the causality chain, not just what happens to each variable.

1 A)Assume the required reserve ratio is 20% and the Open Market Committee of the FED...

1 A)Assume the required reserve ratio is 20% and the Open Market Committee of the FED buys $300 billion in bonds from the public. Assuming banks give out as many loans as possible, what is the total change in the money supply? What is the total change in Transaction Accounts? If the M1 was original $8500 billion, what is the new M1 ( After the change)? You must show your work. B)Assume the required reserve ratio is 10% and the...

in a open market operations the fed buys 15 million of government bonds from individuals what...

in a open market operations the fed buys 15 million of government bonds from individuals what is the results

How does the reserve ratio change if the Fed increases the required reserve ratio? How does...

How does the reserve ratio change if the Fed increases the required reserve ratio? How does the currency-deposit ratio change if people decide to keep more of their money in cash rather than depositing it? If people decide to hold zero currency (cu→0, meaning the currency-deposit ratio goes to zero), what is the relationship between the money supply and the monetary base (what is the money multiplier)? If people decide to hold all of their money as currency and never...

At the Fed, someone proposes to cut the required reserve ratio from 9.6% to 8%. But...

At the Fed, someone proposes to cut the required reserve ratio from 9.6% to 8%. But the others prefer to buy bonds from the market instead, citing the ability of a fractional reserve banking system to create money. If the policy objective of the Fed is to pump another 214 millions of dollars into the economy, without changing the required reserve ratio, at least how many millions worth of bonds should the Fed plan to buy? Round your answer to...

Assume the Fed has established a 10% required reserve ratio for checkable deposits. The Fed does...

Assume the Fed has established a 10% required reserve ratio for checkable deposits. The Fed does not require banks to hold reserves for savings deposits. Further, assume that The First Idaho Bank is a primary dealer, which means that it is able to buy and sell securities directly to the U.S. Federal Reserve (Fed). Remember any bank in the U.S. can borrow from the Fed. Provided below is the balance sheet for The First Bank of Idaho: ASSETS LIABILITES AND...

42. Assume the required reserve ratio is 20 percent and the FOMC orders an open-market purchase...

42. Assume the required reserve ratio is 20 percent and the FOMC orders an open-market purchase of $100 million in government securities from member banks. If the oversimplified money multiplier is assumed, then the money supply will a. decrease by $100 million. b. increase by $100 million. c. decrease by $500 million. d. increase by $500 million. 43. In the mid-1990s, real interest rates fell in the United States. This was the result of budget deficit a. reductions and tighter...

If the Fed sells government securities to the general public in the open market, the A)...

If the Fed sells government securities to the general public in the open market, the A) public gives the securities to the Fed in exchange for a Fed check, which when deposited at commercial banks will decrease their reserves at the Fed. B) Fed gives the securities to the public; the public pays for the securities by writing checks that when cleared will increase commercial bank reserves at the Fed. C) public gives the securities to the Fed in exchange...

15. If a bank faces a reserve requirement of 8 percent and has a reserve ratio...

15. If a bank faces a reserve requirement of 8 percent and has a reserve ratio of 12 percent, then A. government regulation requires the bank to use at least 8 percent of its deposits to make loans. B. the bank’s ratio of loans to deposits is 8 percent. C. the bank keeps 8 percent of its deposits as reserves and loans out the rest. D. the bank keeps 12 percent of its assets as reserves and loans out the...

Suppose that the legal reserve ratio set by the Fed is 10% and that the Fair Bank in Fairdealing

Suppose that the legal reserve ratio set by the Fed is 10% and that the Fair Bank in Fairdealing, Missouri, initially exhibits checkable deposit accounts of $250 and a reserve account of $70.a) A customer of Fair Bank deposits $100 into her checking account. Fair Bank loans 80% of the deposit and places the rest in its reserves at the St. Louis Fed. How much have in excess reserves after the deposit and loan?b) Place the figures below to represent...

Question