If the Fed increases the amount of bank reserves by $100 million,the total money supply will potentially increase by more than $100 million.

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Quizplus · Accepted Answer

The potential increase in the money supply can be magnified through the process of lending and money creation by banks. With a reserve ratio of 10%, for example, the initial injection of $100 million in reserves can potentially result in $1 billion increase in the money supply ($100 million ÷ 0.1). This is referred to as the money multiplier effect. However, the actual increase in the money supply will depend on various factors such as the demand for loans, the willingness of banks to lend, and the overall state of the economy.

If the Fed Increases the Amount of Bank Reserves by $100