The central bank in Hamsterville has bought $\$ 100$ in bonds from a bank. The reserve requirement is $25 \%$.

What is the maximum possible change in the money supply?
Choose 1 answer:
(A) The money supply increases by $\$ 200$
(B) The money supply decreases by $\$ 400$.
(c) The money supply decreases by $\$ 100$
(D) The money supply increases by $\$ 400$.
(E) The money supply increases by $\$ 100$

Question

The central bank in Hamsterville has bought $\$ 100$ in bonds from a bank. The reserve requirement is $25 \%$.

What is the maximum possible change in the money supply?
Choose 1 answer:
(A) The money supply increases by $\$ 200$
(B) The money supply decreases by $\$ 400$.
(c) The money supply decreases by $\$ 100$
(D) The money supply increases by $\$ 400$.
(E) The money supply increases by $\$ 100$

Accepted Answer

∻Solution by Steps∻ ‖ step 1 ⋮ To calculate the maximum possible change in the money supply, we use the money multiplier formula: $$ Money \, Multiplier = \frac{1}{Reserve \, Requirement} $$ ‖ ‖ step 2 ⋮ Given the reserve requirement is 25%, we convert this percentage to a decimal to use in the formula: $$ Reserve \, Requirement = 25\% = 0.25 $$ ‖ ‖ step 3 ⋮ Apply the money multiplier formula with the reserve requirement: $$ Money \, Multiplier = \frac{1}{0.25} = 4 $$ ‖ ‖ step 4 ⋮ Multiply the initial change in the money supply (the central bank buying $100 in bonds) by the money multiplier to find the maximum possible change in the money supply: $$ Maximum \, Change = Money \, Multiplier imes Initial \, Change = 4 imes \$100 = \$400 $$ ‖ ∻Answer∻ ***D*** ∻Key Concept∻ ⚹Money Multiplier⚹ ∻Explanation∻ ⚹The money multiplier represents the maximum amount the money supply can increase based on the reserve requirement. It is the inverse of the reserve ratio.⚹◊What formula can be used to calculate the maximum possible change in the money supply given the purchase of bonds and a reserve requirement percentage?⍭ Generate me a similar question◊$

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