Question

Assume that the reserve requirement is 20%

Assume that the reserve requirement is 20%. Also assume that banks do not hold excess reserves
and there is no cash held by the public. The Federal Reserve decides that it wants to expand the
money supply by $40 million.
a. If the Fed is using open-market operations, will it buy or sell bonds?
b. What quantity of bonds does the Fed need to buy or sell to accomplish the goal? Explain your
reasoning.

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