The money supply increases when the Fed
A)buys bonds.The increase will be larger,the smaller is the reserve ratio.
B)buys bonds.The increase will be larger,the larger is the reserve ratio.
C)sells bonds.The increase will be larger,the smaller is the reserve ratio.
D)sells bonds.The increase will be larger,the larger is the reserve ratio.

Question

Quizplus · Accepted Answer

When the Fed buys bonds, it injects money into the banking system, thus increasing the money supply. The increase will be larger when the reserve ratio is smaller because a smaller reserve requirement means that banks can lend out more of their reserves, thus multiplying the initial injection of funds.

The Money Supply Increases When the Fed