Assume a model where the currency ratio is 02 c 02 the exce

Assume a model where the currency ratio is 0.2 (c = 0.2), the excess reserve ratio is 0.3 (e = 0.3), and the required reserve ratio is 0.3 (r = 0.3). What is the money multiplier? What change in the money supply results from an open market sale of $500,000?

Solution

Money multiplier formula: (c+1) / (c +rr + e).- (0.2 +1) / (0.2 + 0.3 + 0.3) = 1.2 / 0.8

Money multiplier: 1.5.

Change in the money suppy: $750,000. (500,000 x 1.5)

*****