9. Critical analysis Q18

Suppose that the reserve requirement is 25% and that the Federal Reserve purchases $4 billion in bonds from a brokerage firm.

Initially, as a result of this bond purchase, the money supply will______(increase or decrease) by_____ billion.

Suppose the brokerage firm that sold the bonds to the Fed deposits the proceeds of the sale into its account with Nations Bank.

As a result of this deposit, Nations Bank will be able to extend________ billion in additional loans.

Suppose that additional loans are extended throughout the banking system and that the proceeds are always redeposited back into checking accounts.

The M1 money supply will increase by__________ billion if banks use all of their additional reserves to extend new loans.