The Fed conducts an open-market purchase of Treasury bills of $10 million.If the required reserve ratio is 0.10, what change in the money supply can be expected using the oversimplified money multiplier?
A)$100 million
B)$10 million
C)0
D)−$10 million
E)−$100 million

Question

Quizplus · Accepted Answer

The oversimplified money multiplier is 1/required reserve ratio, which in this case is 1/0.10 = 10. Therefore, an open-market purchase of $10 million can potentially increase the money supply by 10 times that amount, or $100 million.

The Fed Conducts an Open-Market Purchase of Treasury Bills of $10