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Money Multiplier: Effect of an Open-Market Transaction

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a) In what sense does the Fed "create money"?

b) Suppose that the minimum required reserve ratio for banks was 1/11. Also suppose that banks held no excess reserves and that currency in circulation was unchanged. What action in the Treasury bill market would the Fed have to take to increase bank checking account deposits by $990 million?

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Solution Summary

This solution shows the calculations required to measure the effect on the money supply of an open-market transaction by the Federal Reserve.

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a) The Fed is responsible for issuing currency and putting it into circulation. In that sense, the Fed is responsible for the amount of money in the economy.

b) The Money ...

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