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Let Mt denote the initial money supply. The Fed buys $50,000 worth of government bonds from Cathie. She keeps 4% of the proceeds in cash
Let Mt denote the initial money supply. The Fed buys $50,000 worth of government bonds from Cathie. She keeps 4% of the proceeds in cash and deposits the rest into her savings account in a local bank. The bank in question keeps 40% of the deposit in reserve and lends the rest to Liam. He keeps 10% of the loan in cash and uses the rest to buy treasury securities. The seller of the treasuries happens to be the Fed. The resulting money supply is Mt+1. Calculate the change in money supply, Mt+1 - Mt
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