If the reserve ratio is 10 percent,banks do not hold excess reserves,and people hold only deposits and no currency,when the Fed sells $10 million dollars of bonds to the public,bank reserves
A) increase by $1 million and the money supply eventually increases by $10 million.
B) increase by $10 million and the money supply eventually increases by $100 million.
C) decrease by $1 million and the money supply eventually increases by $10 million.
D) decrease by $10 million and the money supply eventually decreases by $100 million.

Question

Quizplus · Accepted Answer

When the Fed sells $10 million of bonds, bank reserves decrease by $10 million. With a reserve ratio of 10%, the money supply decreases by a multiple of the reserve ratio, which is $100 million.

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