Assume that the required reserve ratio is 20 percent.If the Federal Reserve buys $80 million in government securities from the general public, then the money supply will immediately
A)increase by $0 with this transaction, and the maximum money-lending potential of the commercial banking system will increase by $400 million.
B)increase by $0 with this transaction, but the maximum money-lending potential of the commercial banking system will increase by $320 million.
C)increase by $80 million with this transaction, and the maximum money-lending potential of the commercial banking system will decrease by another
D)increase by $80 million with this transaction, and the maximum money-lending potential of the commercial banking system will increase by another

Question

Quizplus · Accepted Answer

When the Federal Reserve buys $80 million in government securities, the money supply immediately increases by $80 million. With a reserve ratio of 20%, the banking system can further increase the money supply by up to $320 million (80 million * (1/0.2 - 1)).

Assume That the Required Reserve Ratio Is 20 Percent