Suppose the Reserve Ratio Is 20 Percent and Banks Do

question 24

Multiple Choice

Suppose the reserve ratio is 20 percent and banks do not hold excess reserves. Suppose the Bank of Canada sells $10 million of bonds to the public. Which statement best describes the effects of this open-market operation?

• A) Bank reserves increase by $1 million, and the money supply eventually increases by $10 million.
• B) Bank reserves increase by $10 million, and the money supply eventually increases by $50 million.
• C) Bank reserves decrease by $1 million, and the money supply eventually increases by $10 million.
• D) Bank reserves decrease by $10 million, and the money supply eventually decreases by $50 million.

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