Suppose the Reserve Ratio Is 25% and Banks Do Not

Multiple Choice

Suppose the reserve ratio is 25% and banks do not hold excess reserves. When the Fed sells $40 million of bonds to the public,

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 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.