The money supply increases when the Fed

Name: The money supply increases when the Fed
Brand: Quizplus
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Question

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When the Fed buys bonds, it increases the money supply by injecting reserves into the banking system. The increase in the money supply will be larger when the reserve ratio is smaller because a smaller reserve ratio means that banks have to hold fewer reserves relative to their deposits. This allows them to lend out more money for every unit of reserves they have, leading to a larger increase in the money supply.

The Money Supply Increases When the Fed