CFA Practice Question

There are 341 practice questions for this study session.

CFA Practice Question

If the Fed injects $1 million into the economy by buying T-bills in the open market and the required reserve is 20%, then the money supply will increase a maximum of ______.
A. $800,000
B. $1,000,000
C. $5,000,000
Explanation: The deposit expansion multiplier is 1 / 0.2 = 5 (if a = 0). The money supply will increase by $1 million x 5 = $5 million. However, the actual increase of money supply should be lower.

User Contributed Comments 5

User Comment
Balls Are we assuming the entire 1 million goes into reserve, hence the multipier effect?
bahodir Yeah, here "inject" means increase money supply.
rhardin Why is the bank not holding 20% of this $1,000,000 in reserves? This would result in a money supply increase of $4,000,000 instead. I am confused!
Jurrens Reserve is taken into account (1/.2)
akils the reserve is a percent of customer deposits, it does not change unless customer deposits increase or decrease.
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