The Federal Reserve buys $10,000 of government securities from commercial banks.If the required reserve ratio is 25%, what is the maximum amount of change in the nation's money supply? Assume that no banks keep excess reserves and no individuals or firms hold cash.

Question

Quizplus · Accepted Answer

The maximum amount of change in the money supply is given by the formula: 
Change in Money Supply = Change in Reserves / Reserve Ratio
Here, the Federal Reserve has bought $10,000 of government securities which increases the reserves of commercial banks by $10,000. The reserve ratio is 25%. Therefore, the change in money supply is:
Change in Money Supply = $10,000 / 0.25 = $40,000
Hence, the correct answer is C, the money supply will expand by $40,000.

The Federal Reserve Buys $10,000 of Government Securities from Commercial