Assume That There Is a 25 Percent Reserve Ratio and That

Multiple Choice

Assume that there is a 25 percent reserve ratio and that the Federal Reserve buys $4 billion worth of government securities. If the securities are purchased from the general public, this action has the potential to increase money supply by a maximum of

A) $16 billion, but only by $14 billion if the securities are purchased directly from commercial banks.
B) $14 billion, but by $16 billion if the securities are purchased directly from commercial banks.
C) $16 billion, and also by $16 billion if the securities are purchased directly from commercial banks.
D) $14 billion, and by $20 billion if the securities are purchased directly from commercial banks.