Assume that there is a 25 percent reserve ratio and that the Federal Reserve buys $4 billion worth of government securities.If the securities are purchased from the nonbank public, this action has the potential to increase money supply by a maximum of
A)$16 billion, but only by $14 billion if the securities are purchased directly from commercial banks.
B)$14 billion, but by $16 billion if the securities are purchased directly from commercial banks.
C)$16 billion, and also by $16 billion if the securities are purchased directly from commercial banks.
D)$14 billion, and by $20 billion if the securities are purchased directly from commercial banks.

Question

Quizplus · Accepted Answer

With a 25% reserve ratio, the money multiplier is 4. Therefore, the purchase of $4 billion in securities can increase the money supply by $16 billion, regardless of whether the securities are purchased from the nonbank public or directly from commercial banks.

Assume That There Is a 25 Percent Reserve Ratio and That