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Assume there is a required reserve ratio of 10% and that banks keep no excess reserves. In which of the following scenarios is there a bigger increase in the money supply.i. Jane takes $1,000 from under her mattress and deposits it into a checking account.ii. The Fed purchases $1,000 worth of government securities from a commercial bank.a. Jane depositing the funds into a checking account
b. The Fed purchasing the securities
c. They both increase the money supply by the same amount.
d. Neither of them increases the money supply.

Respuesta :

Answer:

The correct answer is option c.

Explanation:

The required reserve ratio is 10%.

i. Jane deposits $1,000 into a checking account. This will increase the bank's reserves. An increase in reserves will lead to an increase in the money supply.

Increase in money supply

= [tex]\frac{1}{RRR}\ \times\ Increase\ in\ reserves[/tex]

= [tex]\frac{1}{0.10}\ \times\ \$ 1,000[/tex]

= $10,000

ii. If the Fed purchases $1000 worth of securities from a commercial ban, it will pay the bank for it. This will cause the bank reserves to increase. The bank will be able to increase lending. In this way, money supply will increase.

Increase in money supply

= [tex]\frac{1}{RRR}\ \times\ Increase\ in\ reserves[/tex]

= [tex]\frac{1}{0.10}\ \times\ \$ 1,000[/tex]

= $10,000

So both will cause the money supply to increase by the same amount.

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