Fill in the blanks above. Consider an open market purchase by the Fed of $12 bil

Question

Fill in the blanks above.

Consider an open market purchase by the Fed of $12 billion of Treasury bonds. What is the impact of the purchase on the bank from which the Fed bought the securities? Compute the impact on M1 assuming that: (1) the required reserve ratio is 5 percent; (2) the bank does not wish to hold excess reserves; and (3) the public does not wish to hold currency. The bank's securities fall by $12 billion and its reserves rise by $12 billion. Assuming that the required ratio is 5 percent, banks do not want to hold excess reserves, and the public does not wish to hold currency, the simple deposit multiplier will be so the value of deposits (and M1) will rise by $ billion.

Explanation / Answer

Answer to blank 1: 20 (i.e. multiplier = 1/ Required Reserve Ratio = 1/0.05 = 20)

Answer to blank 2: 240 (i.e. 20 * 12)

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