Suppose the Fed purchases $10 million of U.S. securities from the public. If the reserve requirement is 10 percent, the currency holdings of the public are unchanged, and banks have zero excess reserves both before and after the transaction, the total impact on the money supply will be a
A) $10 million decrease in the money supply.
B) $10 million increase in the money supply.
C) $100 million decrease in the money supply.
D) $100 million increase in the money supply.

Question

Quizplus · Accepted Answer

The Fed's purchase of securities increases bank reserves by $10 million. With a 10% reserve requirement, banks can lend out $90 million, leading to a total increase in the money supply of $100 million through the money multiplier effect.

Suppose the Fed Purchases $10 Million of U