Question

Suppose the reserve ratio is 5 percent, banks do not hold excess reserves, people do not hold currency, and the Bank of Canada purchases $20 million of government bonds. Which statement best describes the effects of Bank of Canada's purchase? O a Bank reserves increase by $20 million, and the money supply eventually decreases by $400 million Ob Bank reserves decrease by $20 million, and the money supply eventually increases by $400 million O Bank reserves decrease by $20 million, and the money supply eventually decreases by $400 million O d. Bank reserves increase by $20 million, and the money supply eventually increases by $400 million. ngage.com/takstignment/takelssignment

Answer 1

Because the bank is making the purchase it's reserves decline and the money supply in the economy would increase by $20 million/0.05 = $400 million.

Hence the correct option is

b. Bank reserves decline by $20 million, and the money supply eventually increases by $400 million.