The reserve ratio equals 2 percent. The Fed buys $1 million in U.S. government securities. The most the money supply can increase is

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The reserve ratio is 2 percent, which means banks are required to hold 2 percent of their deposits as reserves. When the Fed buys $1 million in U.S. government securities, banks receive the $1 million as reserves. However, they are only required to hold 2 percent of this as reserves, which is $20,000. The remaining $980,000 can be used to create new loans, which will increase the money supply. The money multiplier is 1/required reserve ratio, which in this case is 1/0.02 = 50. Therefore, the maximum increase in the money supply is $980,000 x 50 = $49 million. Adding the initial $1 million from the Fed’s purchase, the total increase in the money supply is $50 million.

The Reserve Ratio Equals 2 Percent