If the Federal Reserve purchases $1 million in government securities in the open market,with a 25 percent required reserve ratio on deposits,the maximum increase in deposits would be

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The maximum increase in deposits would be $4 million. This is because, with a 25 percent required reserve ratio, banks can lend out 75% of any new deposits. The money multiplier in this case is 1 / 0.25 = 4. Therefore, a $1 million increase in reserves can support a maximum increase in deposits of $1 million * 4 = $4 million.

If the Federal Reserve Purchases $1 Million in Government Securities