a Question Completion Status: QUESTION 20 Suppose that the actual money multipli

Question

a Question Completion Status: QUESTION 20 Suppose that the actual money multiplier equals the maximum potential money multiplier. if the reserve ratio is 10 percent in order for the banking system to increase deposits by $2.5 million, the Fed must O 3 permit the system to have prolonged reserve deficiencies. b. sell $250.000 of government securities to the general public. C sell $2.5 million of government securities to the general public. dbuy s250.000 of government securities from the puylic. QUESTION 21 When the Fed buys a u.s, bond in the open market 3 i ts action contracts total reserves and the money supply itotal reserves ncrease by the amourt of the purchase but the money supply stays the same

Explanation / Answer

Money multiplier is the inverse of reserve ratio. Thus here money multiplier equals 1/0.1=10

In order to increase the deposits in the banking system by 2.5 million, if the fed buys government securities from public worth 250000, then the money multiplier will operate and deposits will increase by 10*250000=2.5 million.

Thus the correct answer is option (d)

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