Assume that the reserve ratio is 5 percent and the Bank of Canada buys a $10 000 bond from a member of the public.As a result:
A)bank reserves are decreased by $10 000
B)the money supply immediately declines by $9500
C)desired bank reserves are increased by $9500
D)the money supply is immediately increased by $10 000
E)the money supply immediately declines by $500

Question

Quizplus · Accepted Answer

When the Bank of Canada buys a bond from a member of the public, it pays for the bond with newly created money. This money is deposited into the seller's bank account, increasing the bank's reserves. Since the reserve ratio is 5 percent, the bank can lend out 95 percent of the new reserves, resulting in an immediate increase in the money supply by $10 000. Therefore, choice D is correct, and choices A, B, C, and E are incorrect.

Assume That the Reserve Ratio Is 5 Percent and the Bank