Answer to Question #171184 in Microeconomics for Julie

Question

Assume that the banking system is loaned up and that any open-market purchase by the Fed directly increases reserves in the banks. If the required reserve ratio is 0.2, by how much could the money supply expand if the Fed purchased $2 billion worth of bonds?

Answer 1

RRR (Required Reserve Ratio) = 0.2

Thus, DM (Deposit Multiple) = 1/RRR = 5

and expansion will be $2 billion*DM = $10 billion