Assume there is no leakage from the banking system and that all commercial banks are loaned up. The required reserve ratio is 10%. If the Fed buys $10 million worth of government securities from the public, the change in the money supply will be

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When the Fed buys $10 million worth of government securities from the public, this initial injection of money can be multiplied throughout the banking system. Given a required reserve ratio of 10%, the money multiplier is 1/(0.10) = 10. Therefore, the total potential increase in the money supply is $10 million * 10 = $100 million.

Assume There Is No Leakage from the Banking System and That