Question #38086
Suppose the Fed sells $5 million worth of bonds to Econobank.
What happens to the reserves of the bank?
What happens to the money supply in the economy as a whole if the reserve requirement is 10%, all payments are made by check, and there is no net drain into currency?
How would your answer in part b be affected if you knew that some people involved in the money creation process kept some of their funds as cash?
What happens to the reserves of the bank?
What happens to the money supply in the economy as a whole if the reserve requirement is 10%, all payments are made by check, and there is no net drain into currency?
How would your answer in part b be affected if you knew that some people involved in the money creation process kept some of their funds as cash?
Expert's answer
Answer on Question #38086 - Economics - Macroeconomics
If the Fed sells $5 million worth of bonds to Econobank, the reserves of the bank will not change. The money supply will increase by $5 million*(1 - 0.1) = $4.5 million, as new money is created. If some people involved in the money creation process keep some of their funds as cash, the increase in money supply will be lower.
