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suppose the federal reserve increases the amount of reserves by $100 million and the total money supply increases by $500 million. instructions: enter your answers as a whole number. a. what is the money multiplier? b. using the money multiplier from part a, how much will the money supply change if the federal reserve increases reserves by $50 million? $ million

Respuesta :

a. The multiplier for money is 5.

b. There will be a $250 million rise in the total money supply.

The following is what the provided data tell us:

Increase of reserves by Fed = $100 million

Increase supply = $500 million

Therefore, the following equation must be used to calculate the money multiplier:

a). Money multiplier = increase in reserves x increase in money supply

So, Money multiplier = Increase in money supply/Increase in reserves

                                 = $500 million/$100 million

                                = 5

In other words, money multiplier = increase in reserves/increase in money supply = $500 million/$100 million = 5 a. The multiplier for money is 5.

b). If the Fed's reserves grow by $50 million and the money multiplier is 5, we can compute the increase in the money supply by doing the following:

Increase in the money supply equals an increase in the Federal

Money multiplier

                                           = $50 million  

                                          = $250 million                  

The Total money supply will increase by $250 million.

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