Suppose the Fed carries out an open market purchase and credits the account of a bank by $160,000. Further suppose that the reserve ratio (RR) is 10%. By how much is the money supply expected to change?
A) $160,000
B) $1.6 million
C) $16 million
D) $1.76 million

Question

Quizplus · Accepted Answer

The money supply is expected to change by the initial deposit multiplied by the money multiplier. The money multiplier is 1/RR, which is 1/0.10 = 10. Therefore, the change in money supply is $160,000 * 10 = $1.6 million.

Suppose the Fed Carries Out an Open Market Purchase and Credits