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Suppose the reserve requirement for the United States is 15%. Instructions: Round your answers to the...

Suppose the reserve requirement for the United States is 15%.

Instructions: Round your answers to the nearest whole number.

a. Suppose the Federal Reserve wants to increase the money supply. What should it do to accomplish this goal?

     The Fed could make an   (Click to select)   open market purchase   open market sale  of $30 billion, resulting in a total increase in the money supply of $ billion.

b. Now suppose the Fed wants to decrease the money supply. What should it do to accomplish this goal?

     The Fed could make an   (Click to select)   open market sale   open market purchase  of $40 billion, resulting in a total decrease in the money supply of $ billion.

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Answer #1

Given : reserve requirement is 15%. Then, money multiplier = 1/reserve ratio = 1/0.15 = 6.67  

a. If Federal Reserve wants to increase the money supply,

the Fed could make an open market purchase of $30 billion. Then, money supply will increase by $30 billion*6.67 = $ 200 billion.

(where, change in money supply = open market purchase/sale amount * money multiplier)

b. Similarly, if Federal Reserve wants to decrease the money supply,

the Fed could make an open market sale of $40 billion. Then, money supply will decrease by $40 billion*6.67 = $ 266.8 billion.

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