Assume a demand deposit multiplier of 2 and a government expenditure of $10 million. If the Treasury borrows that much from the banking system, bank reserves will
A) rise by $2 million.
B) rise by $10 million.
C) rise by $20 million.
D) remain unchanged.

Question

Quizplus · Accepted Answer

When the Treasury borrows $10 million from the banking system, it essentially shifts funds from the banking system to itself without altering the total reserves in the banking system. The reserves are not increased; they are just transferred from the banks to the Treasury, keeping the total reserves unchanged.

Assume a Demand Deposit Multiplier of 2 and a Government