Suppose the required reserve ratio is 10 percent,and the Fed buys $5 million worth of bonds from the public.If the public deposits this amount into transactions accounts,the money supply will

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When the Fed buys bonds from the public, the sellers receive payment in the form of a check. If the check is deposited into a transaction account, the money supply increases. In this case, the increase is equal to the amount of the check, which is $5 million. However, since the required reserve ratio is 10 percent, banks must hold 10 percent of deposits in reserves and can lend out the rest. Therefore, the $5 million deposit creates $45 million of potential lending for the banking system. So, the money supply increases by $5 million in reserve deposits, with an additional lending capacity of $45 million created for the banking system.

Suppose the Required Reserve Ratio Is 10 Percent,and the Fed