Question

Suppose the reserve requirement is 5 percent. How much would reserves need to be initially increased to eventually increase the money supply by 1,000

Answer 1

$50

Step-by-step explanation:

If the required reserves are 5%, then the money multiplier = 1 / 5% = 20. If the FED wants to increase the money supply by $1,000, then it needs to initially inject $1,000 / 20 = $50 into the economy.

When the FED wants to increase the money supply, it engages in an expansionary monetary policy. If it wants to decrease the money supply, then it will engage in a contractionary monetary policy.