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 injects $10 million of new reserves into the banking system. Since the required reserve ratio is 20 percent, this $10 million in new reserves can support $50 million in new deposits and loans ($10 million divided by 0.2). Therefore, the banking system is able to expand the money supply by $50 million.

If the Fed Buys $10 Million Dollars in Government Securities