Suppose that the Fed undertakes an open market purchase of $15 million worth of securities from a bank.If the required reserve ratio is 12%,what is the resulting change in checkable deposits (or the money supply),assuming that there are no cash leakages and that banks hold zero excess reserves?
A) $180 million
B) $12.5 million
C) $18 million
D) $125 million

Question

Quizplus · Accepted Answer

First, we need to calculate the amount of reserves required to be held by the bank after the open market purchase. 
Required Reserve = Required Reserve Ratio x Checkable Deposits 
12% x Checkable Deposits = Required Reserve 
12% x X = $15 million 
X (Checkable Deposits) = $15 million / 0.12 = $125 million 
Therefore, the open market purchase of $15 million will result in an increase in checkable deposits by $125 million (since banks hold zero excess reserves).

Suppose That the Fed Undertakes an Open Market Purchase of $15