Assume the Fed purchases $5,000 worth of U.S. Treasury bonds from Bill Gates, who promptly deposits the money in Microsoft Rules National Bank. Assuming that the required reserve ratio is 25 percent and banks keep zero excess reserves, then the money supply will ultimately:

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When the Fed purchases $5,000 worth of U.S. Treasury bonds from Bill Gates, it pays for it by creating $5,000 new money. When Bill Gates deposits this money in Microsoft Rules National Bank, the bank is required to hold a reserve of 25% of this amount, which is $1,250. The bank can lend out the remaining $3,750 to borrowers. When this loaned amount is deposited in other banks, those banks must also hold 25% in reserves and lend out the remaining amount. This process repeats until the total increase in the money supply is equal to the initial injection of $5,000. Since the initial injection leads to a maximum expansion of the money supply, the ultimate increase in the money supply will be a maximum of $20,000.

Assume the Fed Purchases $5,000 Worth of U