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Assume the reserve ratio is 25 percent and Federal Reserve Banks buy $4 million of U.S. securities from the public, which deposits this amount into checking accounts. As a result of these transactions, the supply of money is:

Respuesta :

Answer:

Given that,

Reserve ratio = 25%

Fed reserve bank buys (securities) from public = $4 million

and public deposits this amount into checking account

Therefore, Initial deposits = $4 million

The supply of money is directly increases by $4 million.

and

Money creating potential of banks = Initial Deposits × [tex](\frac{1}{rr} - 1)[/tex]

                                                          = 4 × [tex](\frac{1}{0.25} - 1)[/tex]

                                                          = 4 × 3

                                                          = $12 million

Hence, money creating potential of the banks is increased by $12 million.

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