Question

To increase the money supply by $10 billions, what is the amount of t bill the Fed has to buy or sell?

Answer 1

Currently, the mandatory reserve requirement in the United States is 10% of deposits.

Therefore,

Money Multiplier = 1 / Required Reserve

Money Multiplier = 1 / 0.10

Money Multiplier = 10

Once we have the multiplier, we can determine the amount of t-bills that need to be purchased.

Amount of t-bills to be bought = Target Increase in Money Supply / Money Multiplier

Amount of t-bills to be bought = 10 / 10

Amount of t-bills to be bought = $1 billion

Therefore, to increase money supply by $10 billion, the Federal Reserve needs to "Buy" t-bills worth $1 billion.