Assume that the required reserve ratio is 20 percent. What is the total possible expansion of the money supply after a $ 400,000 bond purchase by the​ Fed?$---

Answer 1

The required reserve ratio is 20 percent, which means that banks are required to hold 20 percent of their deposits as reserves.

If the Fed purchases a $400,000 bond, that money will enter the banking system as reserves. The banks will then be required to hold 20 percent of these reserves, which would be $80,000.

The remaining $320,000 can be lent out by the banks, which will eventually enter the money supply as new deposits.

Therefore, the total possible expansion of the money supply would be $320,000.

Answer 2

wrong answer. You need to use the following​ relationship:
​(money multiplier) *deposit​ = potential change in the money supply. Where the money multiplier=1/required reserve ratio= 1/0.20=5.0
.

Answer 3

Apologies for the confusion.

Using the given relationship, where the money multiplier is 1/required reserve ratio, we can calculate the potential change in the money supply.

1/0.20 = 5.0

Therefore, the money multiplier is 5.0.

To determine the potential change in the money supply, we multiply the money multiplier by the initial deposit made by the Fed:

$400,000 * 5.0 = $2,000,000

Thus, the total possible expansion of the money supply after the $400,000 bond purchase by the Fed is $2,000,000.