If the required reserve ratio is 10 percent, and banks do not hold excess reserv
ID: 1153571 • Letter: I
Question
If the required reserve ratio is 10 percent, and banks do not hold excess reserves, when the Fed buy $10 million dollars of bonds from the public, bank reserves (D)
A. increase initially by $1 million and the money supply eventually increases by $10 million.
B. decrease initially by $10 million and the money supply eventually decreases by $100 million.
C. decrease initially by $1 million and the money supply eventually increases by $10 million.
D. increase initially by $10 million and the money supply eventually increases by $100 million.
The answer is D, please explain why.
Explanation / Answer
ans.....
the correct option is D
explanation
Deposits increase=money multiplier (10)million=1/10%(10 million) =100 million
Reserves increase =10% of 100 million=10 million
thats why the anss iss D