Assume there is no leakage from the banking system and that all commercial banks are loaned up. suppose the reserve ratio is 25%. when the fed buys $40m of bonds from the public who then deposit the proceeds into the banking system,
a. bank reserves increase by $40 million and money supply could increase by a maximum of $40 million.
b. bank reserves increase by $40 million and the money supply could increase by a maximum of $160 million.
c. bank reserves decrease by $40 million and money supply could decrease by a maximum of $40 million.
d. bank reserves decrease by $40 million and money supply could decrease by a maximum of $160 million.
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Assume there is no leakage from the banking system and that all commercial banks are loaned up. supp...
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