If the federal reserve buys $8000 of us securities from the banks, whats has happened to the mone...

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If the federal reserve buys $8000 of us securities from the banks, whats has happened to the mone...

if the federal reserve buys $8000 of us securities from the banks, whats has happened to the money supply directly? What has happened indirectly if the RR is 10%?

business economics

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Answer 1

Answer #1

When Fed buys securities from banks, it implies that monetary base of bank has increased immediately equal to the 8000. it increases lending capacity of bank. Since here, fund flows from Federal Reserve to Banks.

Further Value of money supplier or deposit multiplier depends on the Reserve Ratio.

= 1/rr

= 1/0.1

= 10 times

8000 increase in monetary base will cause 10 times rise in money supply.

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Answer 2

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