If the reserve ratio is 8 percent, banks do not hold excess reserves, and people do not hold currency, then when the Fed purchases $20 million of government bonds, bank reserves Group of answer choices increase by $20 million and the money supply eventually increases by $250 million. decrease by $20 million and the money supply eventually increases by $250 million. increase by $20 million and the money supply eventually decreases by $250 million. decrease by $20 million and the money supply eventually decreases by $250 million.

Respuesta :

Answer:

increase by $20 million and the money supply eventually increases by $250 million.

Explanation:

The reserve requirement is 8%.

The bank does not hold any excess reserves.

The fed purchases $20 million of government bonds. This would the reserve with the bank to increase by $20 million.

The money supply will increase by $20 million times money multiplier.

The increase in money supply

= [tex]\frac {1}{RR}\times Change\ in\ reserves[/tex]

= [tex]\frac {1}{0.08}\times 20 million[/tex]

= $250 million