Suppose that the money supply increases by $150 million after the Federal Reserve engages in an open market purchase of $50 million. Then the reserve ratio is:

Question

Quizplus · Accepted Answer

The reserve ratio is the ratio of reserves held by banks to their deposits. 
When the Federal Reserve engages in an open market purchase of $50 million, it injects $50 million in reserves in the banking system.
Using the money multiplier equation, we can calculate the eventual change in the money supply:
∆M = ∆RR × (1/rr) = $50 million × (1/0.1) = $500 million
Since the money supply increased by $150 million, we can conclude that:
$150 million = $500 million - $350 million
This means that banks kept $350 million in reserves (out of the $500 million), and lent out the remaining $150 million, increasing the money supply. 
Thus, the reserve ratio is:
Reserves/Deposits = $350 million/$1,050 million = 0.33

Suppose That the Money Supply Increases by $150 Million After