Assume that there are no excess reserves in the banking system when the reserve requirement is 20%.The purchase of $10,000 in U.S.government securities by the Fed from Academy National Bank has the potential to ultimately increase the money supply by:

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When the Federal Reserve purchases $10,000 in U.S. government securities from a bank, it increases the bank's reserves by that amount. With a reserve requirement of 20%, this means the bank must keep 20% of deposits as reserves and can lend out 80%. The initial $10,000 can be lent out, redeposited, and lent out again in a process called the money multiplier effect. The formula for the maximum potential increase in the money supply is 1/reserve requirement ratio. Therefore, 1/0.20 = 5. Thus, the $10,000 can potentially increase the money supply by 5 times that amount, or $50,000.

Assume That There Are No Excess Reserves in the Banking