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28 June, 14:34

The Fed buys $20,000 of government securities. The desired reserve ratio is 5 percent and the currency drain is zero. What will be the change in the quantity of money?

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  1. 28 June, 17:10
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    The answer is $400,000

    Explanation:

    Quantity theory of money states that the quantity of money is directly proportional total spending in an economy.

    Change in quantity of money = new deposits (which can also be new security) : reserve requirements

    The new security is $20,000

    reserve requirements is 5 percent

    Change in quantity of money is:

    $20,000 / 0.05

    =$400,000
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