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Assume that the reserve requirement is 20 percent. Also assume that banks do not hold excess reserves and there is no cash held by the public. The Fed decides that it wants to expand the money supply by $\$$40 million.
a. If the Fed is using open-market operations, will it buy or sell bonds?
b. What quantity of bonds does the Fed need to buy or sell to accomplish the goal? Explain yourreasoning.
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question in Lapland assumed that the reserve requirement is 20% and the bank does not old any access reserves, and the public does not hold any cash. So the fantasize that it wants to expand the money supply by $48,000,000. So if the fad is using off the market operations where it buy or sell buns so it will buy bonds because by buying bow bombs, it inject money into, uh into the economy. So buy bonds here. Okay, B um, what quantity of bonds does defend me to die or sail? To accomplish this? Call? Explain your reasoning so we know that the reserve ratio is 20% right, so we can see. Also, we can calculate the money multiplier, which it's one divided by 20%. That is five. So the money multiplayer is five, so we can calculate that it needs to buy a certain amount of bonds, which means it needs so inject a certain number of money into the economy to make this multiplier works, and then in the end, it will have ah for, ah, 14,000,000 dollars off money supply. So now we can feel in this blank this is just 80,000,000 18 $1,000,000. So the answer to question B is that the government of, well, the fat needs to bye. $18,000,000 off bonds on. In other words, it needs to inject this $80,000,000 into the economy to make this money grow and grow by using this money multiplier. So then, at the end, this is go Oh! Ah, sorry. I was drawn. I was wrong. This this 8,000,000 Not 80,000,000. Yeah, because eight times five is 40. Yeah, So, by buying this $8,000,000 off bonds, it inject this amount of money in the economy and then after circulation, and then after the fact ofthe money multiplier, we have this 40,000,000 off money supply in the economy.
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