In a fractional-reserve banking system with no excess reserves and no currency holdings,if the central bank buys $100 million worth of bonds,
A)reserves and the money supply increase by less than $100 million.
B)reserves increase by $100 million and the money supply increases by $100 million.
C)reserves increase by $100 million and the money supply increases by more than $100 million.
D)both reserves and the money supply increase by more than $100 million.

Question

Quizplus · Accepted Answer

In a fractional-reserve banking system, when the central bank buys bonds, it increases reserves by $100 million. Banks can then lend out a portion of these reserves, leading to a multiplied increase in the money supply through the money multiplier effect, resulting in an increase of more than $100 million in the money supply.

In a Fractional-Reserve Banking System with No Excess Reserves and No