Question

If the required reserve ratio is reduced from 10% in 2020 to 5% in 2021 and the central buys $29.0M worth of securities in 2021, what will be the maximum potential increase in the money supply

Answer 1

money multiplier=$\frac{1}{r}$

change in ratio=10-5=5%

therefore

money multiplier=$\frac{1}{0.05}$

=20

then the potential maximun money supply is

20$\times$$29

=$580