Answer to Question #252851 in Economics for Tenn

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

$$\frac{2}{0.2}=10$$

The money supply will increase by $ 10 billion.