If the required reserve ratio is 10 percent and the Fed buys a $1,000 security from a depository institution, the money supply _____

Question

Quizplus · Accepted Answer

If the required reserve ratio is 10 percent, then the initial deposit of $1,000 would have required the depository institution to hold $100 as reserves and would have lent out $900. When the Fed buys the security, the depository institution's reserves increase by $1,000, which allows them to lend out an additional $9,000, increasing the money supply by $10,000. Therefore, the correct answer is B- increases by $10,000.

If the Required Reserve Ratio Is 10 Percent and the Fed