Suppose the reserve ratio is 20 percent and banks do not hold excess reserves. Under these circumstances, suppose the Bank of Canada sells $50 million of bonds to the public. Which statement best describes the effects of this open-market operation?
A) Bank reserves increase by $50 million, and the money supply eventually increases by $250 million.
B) Bank reserves increase by $50 million, and the money supply eventually increases by $300 million.
C) Bank reserves decrease by $50 million, and the money supply eventually decreases by $250 million.
D) Bank reserves decrease by $50 million, and the money supply eventually decreases by $300 million.
Correct Answer:
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