If a bond dealer sells a government bond to the Fed for $100,000, and the reserve ratio is 10 percent, then the bank that receives a $100,000 deposit from the dealer can expand its loans by ________, and the money supply can increase by as much as ________.

Question

Quizplus · Accepted Answer

With a reserve ratio of 10 percent, the bank can expand its loans by $90,000 (the remaining 90 percent of the deposit). The money supply can increase by as much as $1,000,000 if the loans are continuously deposited and lent out, creating a multiplier effect.

If a Bond Dealer Sells a Government Bond to the Fed