Asked by Giang Nguyen on Jul 15, 2024
Verified
If all banks are subject to a uniform 25% reserve requirement and demand deposits are the only form of money,a $1,000 open market purchase by the Fed would cause the money supply to
A) increase by $1,000.
B) decrease by $1,000.
C) decrease by $4,000.
D) increase by $4,000.
Reserve Requirement
The minimum amount of reserves a bank must hold against deposits, set by the central bank, influencing the money supply and banking stability. A rephrased definition since "Required Reserves" is a similar concept.
Open Market Purchase
An activity by a central bank to buy securities in the open market to increase the money supply and stimulate economic growth.
Money Supply
The collective value of all cash, bank deposits, and liquid financial resources existing in an economy at a particular time.
- Analyze the impact of Federal Reserve actions on the money supply.
Verified Answer
VS
Vibhav SaxenaJul 20, 2024
Final Answer :
D
Explanation :
When the Fed makes an open market purchase of $1,000, it adds $1,000 to the reserves of the seller's bank. Since the reserve requirement is 25%, the bank can lend out $3,000 (75% of the $4,000 in new reserves). As the loan is made, the customer's demand deposit account increases by $3,000, which increases the money supply by a total of $4,000. Therefore, the correct answer is D.
Learning Objectives
- Analyze the impact of Federal Reserve actions on the money supply.