Deep recession: Fed wants +$5 bn money supply with 10 % RR should:
Buy $50 m bonds.
To increase the money supply by $5 billion with a required reserve ratio (RR) of 10%, the Federal Reserve should purchase $50 million in bonds. This is because the money multiplier effect dictates that every dollar added to the banking system can create additional money based on the reserve ratio.
Purchasing $50 million in bonds allows banks to increase their reserves by this amount. With a 10% reserve requirement, this action generates a money multiplier of 10 (1 / 0.10), resulting in a total increase in the money supply of $500 million. Since the Fed needs to ultimately increase the money supply by $5 billion, this action can be repeated multiple times through the banking system.
Selling $50 million in bonds would decrease the reserves of banks, leading to a contraction of the money supply. When bonds are sold, banks must pay for them, which reduces their reserves and ultimately decreases the amount of money they can lend out, opposing the goal of increasing the money supply.
While buying $500 million in bonds would significantly increase reserves, this action would result in a money supply increase of $5 billion immediately. However, it is not the minimal required action to achieve the desired increase, which can be accomplished through smaller purchases.
Buying $5 billion in bonds would directly increase the money supply by the same amount instantly. This is excessive when a smaller purchase of $50 million would suffice, making this option inefficient and unnecessary.
To achieve a $5 billion increase in the money supply while maintaining a 10% reserve requirement, the Federal Reserve should buy $50 million in bonds. This approach leverages the money multiplier effect, allowing for a calculated and efficient increase in money supply without overshooting the target. Other options either counteract the goal or represent unnecessary excess.
Related Questions
View allWhich model shows households supplying factors of production and firms...
Which activity is included in GDP?
Which action increases supply of loanable funds?
Money demand shifts right when:
Budget-deficit borrowing from the public most likely:
Related Quizzes
View allAmerican Government CLEP Cheat Sheet
CLEP College Algebra Exam Questions
CLEP College Algebra Exam Guide
CLEP College Mathematics Exam Secrets Study Guide
CLEP History of the United States II Examination Guide
CLEP History of the United States II Examination Guide
Humanities CLEP Test Study Guide
CLEP Humanities Test Questions
CLEP Introductory Psychology Examination Guide
CLEP Western Civilization I Exam Secrets Study Guide
- ✓ 500+ Practice Questions
- ✓ Detailed Explanations
- ✓ Progress Analytics
- ✓ Exam Simulations