If a Bank Uses $80 of Excess Reserves to Make

Multiple Choice

If a bank uses $80 of excess reserves to make a new loan when the reserve ratio is 25 percent, what happens to the money supply?

A) The money supply initially decreases by $80.
B) The money supply initially increases by $20.
C) The money supply will eventually increase by more than $20 but less than $80.
D) The money supply will eventually increase by $320.