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Question
The reserve ratio is 10 percent and all loan proceeds are deposited in transactions accounts. A bond dealer has $100 million in deposits, $8 million in vault cash, and $7 million in deposits at the Fed. The Fed sells $1 million in securities to the bond dealer. As a result, of this transaction alone,
A) the money supply falls by $1 million and total reserves fall by $1 million.
B) the money supply falls by $1 million and total reserves rise by $1 million.
C) the money supply rises by $1 million, total reserves fall by $900,000.
D) the money supply rises by $1 million, but reserves do not change.
Answer
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