Suppose the Federal Reserve carries out an open market purchase and increases bank reserves by $160,000. Further suppose that reserve ratio is 10%. By how much is the money supply expected to change? Select one:

a. $1.6 million
b. $160,000
c. $320,000
d. $17.6 million

If bank reserves are increased by $160,000 and that the reserve to money supply ratio is 10% the increase in money supply is expected to be as follows:

[tex]Increase\ in\ money\ supply=\frac{Increase\ in\ bank\ reserves}{reserve\ ratio}\\Increase\ in\ money\ supply=\frac{\$160,000}{0.10}\\Increase\ in\ money\ supply=$1,600,000[/tex]

Therefore, an increase of $1,600,000 in money supply is expected.

The answer is a.

Suppose the Federal Reserve carries out an open market purchase and increases bank reserves by $160,000. Further suppose that reserve ratio is 10%. By how much is the money supply expected to change? Select one: a. $1.6 million b. $160,000 c. $320,000 d. $17.6 million

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Suppose the Federal Reserve carries out an open market purchase and increases bank reserves by $160,000. Further suppose that reserve ratio is 10%. By how much is the money supply expected to change? Select one:

a. $1.6 million
b. $160,000
c. $320,000
d. $17.6 million