Question

If the Federal Reserve buys $250 million worth of U.S. Treasury bills in the open market, and the reserve ratio is 10%, then at most the money supply will:________

Answer 1

Answer: c) potentially increase by $2,500 million.

Explanation:

If the Federal reserve buys $250 million worth of US Treasury bills then they are injecting money into the economy. This money will potentially be deposited in banks which will then use it to create money by continually loaning it out.

Should that be the case, the maximum amount that will be created is calculated by;

= Total cash introduced / reserve ratio

= 250/0.10

= $2,500 million

Cash will potentially increase by $2,500 million.