If all banks are subject to a uniform 25% reserve requirement and demand deposits are the only form of money,a $1,000 open market purchase by the Fed would cause the money supply to

Question

Quizplus · Accepted Answer

When the Fed makes an open market purchase of $1,000, it adds $1,000 to the reserves of the seller's bank. Since the reserve requirement is 25%, the bank can lend out $3,000 (75% of the $4,000 in new reserves). As the loan is made, the customer's demand deposit account increases by $3,000, which increases the money supply by a total of $4,000. Therefore, the correct answer is D.

If All Banks Are Subject to a Uniform 25% Reserve