Suppose that the reserve requirement on banks is 10 percent. If the Federal Reserve buys $100 of Treasury securities and the money supply increases by $1,000, then we can conclude that:

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The money multiplier is calculated as 1/reserve requirement. With a reserve requirement of 10 percent, the money multiplier is 10. This means that for every $1 the Federal Reserve injects into the banking system, the money supply can increase by up to $10, assuming banks lend out the maximum allowable and there are no leaks (such as people holding cash or banks holding excess reserves). Since the Federal Reserve's purchase of $100 in Treasury securities led to a $1,000 increase in the money supply, this perfectly matches a money multiplier of 10.

Suppose That the Reserve Requirement on Banks Is 10 Percent