Question
In: Finance
The Federal Reserve purchases a $1000 Treasury Bond in an open market transaction. With a 15%...
The Federal Reserve purchases a $1000 Treasury Bond in an open market transaction. With a 15% reserve requirement, what is the theoretical maximum increase in system-wide bank deposits?
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Expert Solution
When the Federal Reserve would be purchasing $1000 treasury Bond in open market transaction with 15% of Reserve Requirement, it will mean that theoretical maximum increase in system wise Bank deposit will be to the extent of-
Money supply reserve Multiplier= (1/Reserve requirement ratio)
=( 10,000/15%)= 6666.666
Total amount of money which has been kept in Reserve requirement= (6666*15%)= 10000
Total amount of theoretical maximum increase in system-wide deposits
= (6666.666-1000)= $5666.666
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