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 $25 billion of U.S. bonds in the open market, banks will receive an increase in reserves. Assuming a reserve requirement of 20%, banks will be able to create up to $125 billion of new loans ($25 billion divided by 0.2). This increase in loans will lead to an increase in M1, the money supply. Therefore, choice C is the correct answer.

If the Fed Buys $25 Billion of U