Question

The Federal Reserve conducts a $30 million open-market purchase of government bonds. If the required reserve ratio is 15 percent, the largest possible increase in the money supply that could result is ___ $ million, and the smallest possible increase is ___ $ million.

Answer 1

The largest possible increase in the money supply resulting from a $30 million open-market purchase of government bonds is $200 million, while the smallest possible increase is $4.5 million.

Step-by-step explanation:

To calculate the largest and smallest possible increases in the money supply resulting from a $30 million open-market purchase of government bonds, we need to consider the required reserve ratio. The required reserve ratio is the percentage of deposits that banks are required to hold in reserves. In this case, the required reserve ratio is 15%.

To calculate the largest possible increase, we divide the $30 million by the required reserve ratio (0.15). The formula is the largest increase = open-market purchase / required reserve ratio. So, the largest increase is $200 million.

To calculate the smallest possible increase, we multiply the open-market purchase by the required reserve ratio. The formula is the smallest increase = open-market purchase× required reserve ratio. Thus, the smallest increase is $4.5 million.

Answer 2

a. 200 million

b. 30 million

The answer and procedures of the exercise are attached in the image below.

Explanation

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