If the required reserve ratio in the banking system is 10% and the Fed buys $1,000 in U.S. bonds, what will happen to supply?

Question

Quizplus · Accepted Answer

When the Fed buys U.S. bonds, it injects money into the banking system. As a result, the banks will have more funds to use for lending and investments. If the required reserve ratio is 10%, then the banks will be able to lend out 90% of the newly injected funds. Therefore, the increase in the money supply will be equal to 10 times the amount of bonds purchased, or $10,000 in this case.

If the Required Reserve Ratio in the Banking System Is