Question

If the required reserve ratio is 100 percent, could the Federal Reserve still change the money supply using open market operations? Indicate YES or NO and then support your answer.

Answer 1

Yes

Under this rule, all the increase in deposits are used as required reserves and there is no increase in excess reserves. This implies there can be no increase in the amount of loans / borrowings so money supply would only rise by the amount of deposits. Money multiplier would 1 / 100% or 1. So open market operations will increase money supply by the same amount as the size of sale or purchase of securities / change in deposits.