Problem
Suppose that the reserve requirements are 10 percent and that the Federal Reserve purchases $2 billion in securities on a given day.
a. How will this transaction affect the Ml money supply?
b. If the brokerage firm that sold the bonds to the Fed deposits the proceeds of the sale into its account with City Bank, what is the maximum amount of additional loans that City Bank will be able to extend as the result of this deposit?
c. If additional loans are extended throughout the banking system and the proceeds are always redeposited back into a checking account, by how much will the M1 money supply increase if banks use all their additional reserves to extend new loans?
d. Why is the actual money deposit multiplier generally less than the potential multiplier?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.