Suppose the money supply (as measured by checkable deposits) is currently $400 billion. the required reserve ratio is 25%. banks hold $100 billion in reserves, so there are no excess reserves. the federal reserve ("the fed") wants to increase the money supply by $18 billion, to $418 billion. it could do this through open-market operations or by changing the required reserve ratio. assume for this question that you can use the oversimplified money multiplier formula.

1) To increase money supply by open market operations, Fed should buy $7 billion of government securities.

2) To increase money supply by adjusting reserve ratio, Fed should decrease the required reserves ratio.

Explanation:

The Money multiplier = 1 / Required reserves ratio = 1 / 0.25 = 4

1) To increase money supply by open market operations, Fed should Sell $7 billion of government securities.

( money supply increase by $4. So, to increase money supply by $35 billion, government securities to be sold to the amount of $18 billion / 4 = $4,5 billion)

(2) To increase money supply by adjusting reserve ratio, Fed should decrease the required reserves ratio.

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