If the Federal Reserve buys $250 million worth of U.S. Treasury bills in the open market and the reserve ratio is 10%, then the money supply will:

Question

Quizplus · Accepted Answer

When the Federal Reserve buys $250 million worth of U.S. Treasury bills in the open market, it injects new reserves into the banking system. Assuming a reserve ratio of 10%, this new injection of reserves has the potential to support $2,500 million in new loans and deposits. This is because, with a reserve ratio of 10%, banks are required to hold 10% of deposits as reserves, and can loan out the other 90%. Therefore, the initial injection of $250 million in reserves can support $2,500 million in new loans and deposits. This increases the money supply in the economy.

If the Federal Reserve Buys $250 Million Worth of U