Assume all banks in the system started have a 10 percent required reserve ratio and the Fed made a $20,000 open market purchase. The result would be a(n):
A) $200,000 expansion of the money supply.
B) $20,000 expansion of the money supply.
C) $20,000 contraction of the money supply.
D) infinite contraction of the money supply.

Question

Quizplus · Accepted Answer

The correct answer is A) $200,000 expansion of the money supply. This is because, with a 10 percent required reserve ratio, every dollar of reserves can support $10 of deposits through the money multiplier effect. Therefore, a $20,000 open market purchase by the Fed can potentially lead to a $200,000 (= $20,000 * 10) expansion in the money supply.

Assume All Banks in the System Started Have a 10