Suppose the desired reserve ratio is 0.2, and the Bank of Canada buys $3,000 of Canadian government securities.What is the maximum amount by which the money supply can increase?

Question

Quizplus · Accepted Answer

The maximum increase in the money supply is determined by the money multiplier formula, which is 1/reserve ratio. With a reserve ratio of 0.2, the money multiplier is 1/0.2 = 5. Therefore, if the Bank of Canada buys $3,000 of securities, the maximum increase in the money supply is 5 * $3,000 = $15,000.

Suppose the Desired Reserve Ratio Is 0