If the Federal Reserve buys $500 of government securities when the required reserve ratio is 20 percent, the maximum potential change in the money supply is a(n)

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The required reserve ratio of 20 percent means that banks are required to hold 20 percent of their deposits as reserves and can lend out the remaining 80 percent. When the Federal Reserve buys $500 of government securities, it pays for them by increasing the reserves of banks by $500. Based on the required reserve ratio of 20 percent, this $500 could potentially support up to $2,500 of new loans (80% of $2,500 is $2,000, and the required reserves on that $2,000 is $400, leaving $1,600 of potential new loans). Therefore, the maximum potential change in the money supply is an increase by $2,500.

If the Federal Reserve Buys $500 of Government Securities When