. Suppose the Fed wished to increase the money supply by $50 billion to heed off a coming recession. Also assume the reserve requirement is 20% and banks hold no excess reserves.

a. What is the deposit expansion multiplier?

b. If the fed wanted to use open market operations, should it buy or sell bonds?

c. How many dollars' worth of bonds should it buy or sell?

d. Rework parts a, b and c using a value for the reserve requirement of 10%. (3mks)

Multiplier =

Should the fed buy or sell bonds?

How many dollars' worth of bonds should it buy or sell?

Does the multiplier rise or fall? (1 mk)

To accomplish the same increase, will the FED now have to buy/sell more or less bonds? 2 mks)