7. Assume the required reserve ratio is 20 percent. If the Federal Reserve buys

ID: 1187530 • Letter: 7

Question

7. Assume the required reserve ratio is 20 percent. If the Federal Reserve buys $80

million in government securities from the public, then the money supply will

immediately:

A. Increase by $80 million, but the maximum money-lending potential of the

commercial banking system will decrease by $80 million

B. Increase by $80 million, and the maximum money-lending potential of the

commercial banking system will increase by another $320 million

C. Increase by $80 million, and the maximum money-lending potential of the

commercial banking system will increase by another $400 million

D. Increase by $80 million, and the maximum money-lending potential of the

commercial banking system will increase by another $80 million

Please explain the answer........

As required reserve ratio is 20 percent.

Federal Reserve buys $80

million in government securities from the public,

20%=80

100%=400

400-80=320

B. Increase by $80 million, and the maximum money-lending potential of the

commercial banking system will increase by another $320 million

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