Suppose a Bank Uses $100 of Its $500 Excess Reserves

Multiple Choice

Suppose a bank uses $100 of its $500 excess reserves to make a new loan when the reserve ratio is 20 percent. How does this action by itself initially change the money supply?

A) The money supply increases by $80.
B) The money supply decreases by $80.
C) The money supply increases by $100.
D) The money supply decreases by $100.