Assume That the Required Reserve Ratio Is 20 Percent

Multiple Choice

Assume that the required reserve ratio is 20 percent. If the Federal Reserve buys $80 million in government securities from the general public, then the money supply will immediately

A) increase by $0 with this transaction, and the maximum money-lending potential of the commercial banking system will increase by $400 million.
B) increase by $0 with this transaction, but the maximum money-lending potential of the commercial banking system will increase by $320 million.
C) increase by $80 million with this transaction, and the maximum money-lending potential of the commercial banking system will increase by another $400 million.
D) increase by $80 million with this transaction, and the maximum money-lending potential of the commercial banking system will increase by another $320 million.