Suppose the Fed buys $5,000 of U.S.Treasury bonds from Donald Trump.If the reserve requirement is 25 percent,the currency holdings of the public are unchanged,and banks have zero excess reserves both before and after the transaction,the total impact on the money supply will be a

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When the Fed buys Treasury bonds from Donald Trump, it pays him with a check, which increases his bank account by $5,000. Assuming a reserve requirement of 25%, banks are required to hold $1,250 in reserves for every $5,000 deposit they receive. Therefore, Trump's bank must hold $1,250 of his deposit as reserves and can lend out the remaining $3,750. This loan becomes a new deposit in another bank, which must also hold $937.50 in reserves and can lend out $2,812.50. This process continues until the total increase in the money supply is $20,000 [$5,000/(1-0.25)]. Hence, the total impact on the money supply will increase by $20,000.

Suppose the Fed Buys $5,000 of U