Table 29-1
Effects of an open-market transaction on the balance sheets of banks and the fed (in millions of dollars)
-In Table 29-1, if the required reserve ratio is 10 percent, what will happen to the money supply? Use the oversimplified money multiplier in your calculations.
A)The money supply will decrease by $100 million.
B)The money supply will decrease by $10 million.
C)The money supply will not change.
D)The money supply will increase by $10 million.
E)The money supply will increase by $100 million.

Question

Table 29-1
Effects of an open-market transaction on the balance sheets of banks and the fed (in millions of dollars)  ​
-In Table 29-1, if the required reserve ratio is 10 percent, what will happen to the money supply? Use the oversimplified money multiplier in your calculations.
A)The money supply will decrease by $100 million. 
B)The money supply will decrease by $10 million. 
C)The money supply will not change. 
D)The money supply will increase by $10 million. 
E)The money supply will increase by $100 million.

Quizplus · Accepted Answer

The oversimplified money multiplier formula is 1/required reserve ratio. With a 10 percent reserve ratio, the multiplier is 1/0.10 = 10. This means every dollar of reserves can support $10 of deposits. Therefore, any increase in reserves can increase the money supply by 10 times that amount.

Table 29-1 Effects of an Open-Market Transaction on the Balance Sheets of Sheets