Suppose the Central Bank sells $5 million worth of bonds.
Calculate the money multiplier in each case. Also
calculate what is the maximum possible change in the money supply
if the required reserve ratio is:
a) 2%
b) 4%
c) 5%
d) 10%
e) 20%
The Change in Reserves = $5 million
Since the Fed sells $5 million worth of bonds, there will be decrease in the money supply in the economy.
It shall be noted that money multiplier = 1/required-reserve ratio
And the maximum possible change in money supply = money multiplier * Change in Reserves
| Required reserve-ratio | Money multiplier | Change in Reserves | Maximum possible decrease in money supply | |
| a) | 2% | 50 | $50,00,000 | $25,00,00,000 |
| b) | 4% | 25 | $50,00,000 | $12,50,00,000 |
| c) | 5% | 20 | $50,00,000 | $10,00,00,000 |
| d) | 10% | 10 | $50,00,000 | $5,00,00,000 |
| e) | 20% | 5 | $50,00,000 | $2,50,00,000 |
Get Answers For Free
Most questions answered within 1 hours.