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The federal reserve has been paying interest on bank excess reserves since October 2008. In these circumstances, the money supply will rise by less than $3 billion if the fed purchases $400 million worth of government securities from a bank. Option [A] is the correct choice.
The American central bank is known as the Federal Reserve System. It carries out five general tasks to advance the well-being of the American economy and, more broadly, the public interest. The Board of Governors in Washington, D.C., whose members are chosen by the President with the advice and permission of the Senate, and the Reserve Banks and Branches, which make up the System's operating presence around the nation, share several duties within the system.
Although the Federal Reserve often communicates with members of the executive branch and Congress, its decisions are made independently.
Reserve type of requirement = 3 million * 0.10 = 0.3 million
Excess type of reserve = 3 - 0.3 = 2.7 million
Required to reserve ratio = 10%
Money always multiplier = 1 / Required reserve ratio = 1 / 0.10 = 10
Increase in amount supply = 2.7 million * 10 = $2.7 billion.
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Correct Question:
Since October 2008, the Federal Reserve has paid interest on excess reserves held by banks. Under these circumstances, if the Fed buys Treasury securities worth $300 million from a bank, how will the money supply be affected? Assume that the required reserve ratio is 10% and that all currency is deposited into the banking system.
Choose one:
A. The money supply will increase by less than $3 billion.
B. The money supply will increase by $3 billion.
C. The money supply will not change at all.
D. The money supply will increase by more than $3 billion.
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