The required reserve ratio is 20 percent. The bank of a bond dealer has $100 mil

Question

The required reserve ratio is 20 percent. The bank of a bond dealer has $100 million in deposits, $10 million in vault cash, $10 million in deposits with the Fed, and $10 million in government securities. The Fed buys $1 million in securities from the bond dealer. As a result of the transaction, a. the money supply immediately rises by $1 million, total reserves increase by $1 million, and excess reserves increase by $1 million. b. the money supply doesn't change, total reserves increase by $800,000, and excess reserves increase by $200,000. c. the money supply immediately rises by $1 million, total reserves increase by $1 million, and excess reserves increase by $800,000. d. the money supply immediately rises by $1 million, total reserves increase by $800,000, and excess reserves increase by $200,000.

Explanation / Answer

c. the money supply immediately rises by $1 million, total reserves increase by $1 million, and excess reserves increase by $800,000.

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