A bank has excess reserves of $1 million and wants to convert the reserves into

Question

A bank has excess reserves of $1 million and wants to convert the reserves into something that earns interest. It can buy a certificate of deposit or it can make a loan. The reserve requirement is 20 percent. The effect on the money supply is a. positive if it makes the loan and zero if it buys the CD b. positive if it buys the CD and pays for the CD with a check, and zero if it makes the loan c. positive in either case-the money supply increases by $1 million d. positive in either case-the money supply increases by $200,000

Explanation / Answer

The effect on the money supply is positive in either case-the money supply increases by $1 million. So the correct option is C.

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