If all banks are subject to a uniform 20% 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

The reserve requirement is 20%, which means that banks have to keep 20% of their deposits in reserve and can lend out the rest. In this case, the $1,000 open market purchase by the Fed increases the reserves of the bank by $1,000, allowing the bank to lend out an additional $4,000 since $5,000 was previously held in reserves. This means that the money supply has increased by $5,000. Therefore, the correct choice is D.

If All Banks Are Subject to a Uniform 20% Reserve