Assume the reserve requirement is 10%. If the Federal Open Market Committee buys a $10,000 bond from Bank A, Bank A's reserves
A) decrease by $10,000.
B) increase by $9,000.
C) increase by $1,000.
D) increase by $10,000.

Question

Quizplus · Accepted Answer

When the Federal Open Market Committee buys a $10,000 bond from Bank A, Bank A's reserves increase by $10,000 because the Fed pays for the bond by increasing the reserves of Bank A. Since the reserve requirement is 10%, this means that Bank A can now lend out an additional $90,000 ($10,000 divided by 0.10), which increases the money supply. Thus, the correct answer is D: the reserves of Bank A increase by $10,000.

Assume the Reserve Requirement Is 10