Finance, Forex and Investments

Assuming the reserve requirement is 20 percent and commercial banks have no excess reserves initially, the com?

Assuming the reserve requirement is 20 percent and commercial banks have no excess reserves initially, the commercial banking system could increase the money supply by a maximum of $1,000,000 if the Federal Reserve Banks would a) buy $250,000 of securities from commercial banks. b) sell $1,000,000 of securities to commercial banks. c) buy $1,000,000 of securities from commercial banks. d) buy $200,000 of securities from commercial banks. e) sell $200,000 of securities to commercial banks.

Public Comments

1. e you take the original money, in this case 200,000 and multiply it by 1/R, where R is the reserve requirement. 20% = 1/5 and 1/(1/5)=5, so you multiply 200,000 by 5
2. D would be the correct answer.