Asked by Abigail Martinez on Apr 24, 2024
Verified
If all banks are subject to a uniform 20% 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 $5,000.
D) increase by $5,000.
Reserve Requirement
A regulation set by central banks that specifies the minimum amount of reserves a bank must hold in relation to customer deposits.
Open Market Purchase
A monetary policy tool where the central bank buys government securities from the market in order to expand the money supply.
Money Supply
The total financial assets present within an economy, inclusive of cash, coins, and the amounts present in checking and savings accounts, at a certain point.
- Investigate the influence of Federal Reserve operations on monetary distribution.
Verified Answer
PN
Princess NessaMay 02, 2024
Final Answer :
D
Explanation :
The reserve requirement is 20%, which means that banks have to keep 20% of their deposits in reserve and can lend out the rest. In this case, the $1,000 open market purchase by the Fed increases the reserves of the bank by $1,000, allowing the bank to lend out an additional $4,000 since $5,000 was previously held in reserves. This means that the money supply has increased by $5,000. Therefore, the correct choice is D.
Learning Objectives
- Investigate the influence of Federal Reserve operations on monetary distribution.