The Federal Reserve wants to increase our money supply in th

The Federal Reserve wants to increase our money supply in the economy from $500 Billion to $700 Billion. If RR = 20% How much should the Fed print to achieve + $200 Billion?

X * (1 / .2) = 200 Billion

X = 40 Billion increase in money supply

With the above given information, The Federal Reserve wants to increase the money supply in the economy by +200 billion from 500 billion by only changing the RR and not printing more money. What should the Required Reserve Ratio be?

Explain and show detailed work on how you got the answer.

Solution

When money supply needs to be increased by 200million and reserve ratio=0.2=20%

Then money multiplier=1/r=1/0.2=5

Money multiplier=change in money supply/change in high powered money

Thus change in H=200/5=$40billion

2nd part

When rr=20% then initial high powered money supply=500/5=100billion

Keeping high powered money at 100billion only, wd need to increase money supply to 700billion

Multiplier needs to be 700/100=7

And reaerve rate=1/multiplier=1/7=0.1428=14.3%

Thus reserve ratio should be decreased to 14.3%