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 $5 million worth of bonds from the public, it increases the amount of reserves in the banking system by $5 million. Since the required reserve ratio is 10%, the initial impact is an increase in the lending capacity of the banking system by $50 million (10% of $5 million). However, when the public deposits the $5 million into transactions accounts, the banks can use these deposits to create more money through the deposit multiplier. Assuming a deposit multiplier of 9 (which is a reasonable estimate), the $5 million deposit can create an additional $45 million in loans. Therefore, the money supply will increase directly 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