If the Fed buys $10 million dollars in government securities, and the required reserve ratio is 20 percent, the banking system is able to expand the money supply by:

Question

Quizplus · Accepted Answer

When the Fed buys $10 million in government securities, it increases the reserves in the banking system by $10 million. With a required reserve ratio of 20%, banks can lend out 80% of their deposits. The money multiplier is 1/0.20 = 5. Therefore, the total potential increase in the money supply is $10 million * 5 = $50 million.

If the Fed Buys $10 Million Dollars in Government Securities