The Federal Reserve buys $10,000 of government securities from commercial banks. If the required reserve ratio is 25%, what is the maximum amount of change in the nation's money supply? Assume that no banks keep excess reserves and no individuals or firms hold cash.

Question

Quizplus · Accepted Answer

The maximum amount of change in the nation's money supply is determined by the money multiplier formula: change in money supply = (1/reserve ratio) x initial change in reserves. In this case, the initial change in reserves is $10,000 and the reserve ratio is 25%, so the money multiplier is 1/0.25 = 4. Therefore, the maximum change in the money supply is $10,000 x 4 = $40,000, which is option C.

The Federal Reserve Buys $10,000 of Government Securities from Commercial