Suppose the Fed buys $10 million of U.S.securities from the public.Assume a reserve requirement of 5 percent and that all banks hold no excess reserves.The total impact of this action on the money supply will be
A)an increase of $200 million.
B)a decrease of $200 million.
C)a decrease of $10 million.
D)an increase of $10 million.

Question

Quizplus · Accepted Answer

When the Fed buys $10 million of U.S. securities, it injects $10 million into the banking system. With a reserve requirement of 5%, the money multiplier is 1/0.05 = 20. Therefore, the total increase in the money supply is $10 million * 20 = $200 million.

Suppose the Fed Buys $10 Million of U