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What is the change in the money supply when the fed purchases $700 worth of bonds and the required reserve ratio is 14 percent assuming banks hold no excess reserves?

Respuesta :

The increase in the money supply is $5,000.

Definition of ratio -

  • The specified quotient of two mathematical expressions is the definition of ratio.
  • the link between two or more things in terms of quantity, amount, or size.

Money multiplier m=1/1-r

where r is required reserve ratio

When fed purchases $700 of bonds, it gets 700 money supply.

Change in money supply = multipler * 700

=1/(1-0.14)*700

= $5,000

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