If the reserve ratio is 10 percent,banks do not hold excess reserves,and people do not hold currency,then when the Fed purchases $20 million of government bonds,bank reserves
A)increase by $20 million and the money supply eventually increases by $200 million.
B)decrease by $20 million and the money supply eventually increases by $200 million.
C)increase by $20 million and the money supply eventually decreases by $200 million.
D)decrease by $20 million and the money supply eventually decreases by $200 million.

Question

Quizplus · Accepted Answer

With a 10% reserve ratio, every $1 increase in bank reserves can lead to a $10 increase in the money supply through the process of money creation. Therefore, the initial increase of $20 million in bank reserves will eventually lead to a $200 million increase in the money supply.

If the Reserve Ratio Is 10 Percent,banks Do Not Hold