If the Fed buys $25 billion of U.S.bonds in the open market and the reserve requirement is 20 percent,M1 will eventually

Question

Quizplus · Accepted Answer

When the Fed buys bonds in the open market, it increases the reserves of the banking system. With a 20% reserve requirement, each dollar of reserves can support $5 of deposits because $1 / 0.20 = $5. Therefore, a $25 billion increase in reserves can increase the money supply (M1) by $125 billion, due to the money multiplier effect.

If the Fed Buys $25 Billion of U