Suppose the Reserve Ratio Is 5 Percent, Banks Do Not

Multiple Choice

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?

A) Bank reserves increase by $20 million, and the money supply eventually increases by $400 million.
B) Bank reserves decrease by $20 million, and the money supply eventually increases by $400 million.
C) Bank reserves increase by $20 million, and the money supply eventually decreases by $400 million.
D) Bank reserves decrease by $20 million, and the money supply eventually decreases by $400 million.