If the Bank of Canada enters the open market and purchases $1000 of government securities,what will be the eventual change in the money supply given a 10% target reserve ratio in the commercial banking system?

Question

Quizplus · Accepted Answer

When the Bank of Canada purchases $1000 of government securities, it pays for this purchase by increasing the reserves of the seller's bank. Given a 10% target reserve ratio, the seller's bank can then lend out $900 of those newly acquired reserves, which will eventually result in a total increase in the money supply of $10 000 (900/.1 = 9000, plus the initial $1000 purchase). Therefore, the correct answer is E.

If the Bank of Canada Enters the Open Market and Purchases