Suppose the Reserve Ratio Is 10 Percent, Banks Do Not

Multiple Choice

Suppose the reserve ratio is 10 percent, banks do not hold excess reserves, people do not hold currency, and the Bank of Canada purchases $20 million of government bonds. Which of the following best describes the effects of Bank of Canada's purchase?

A) Bank reserves increase by $20 million, and the money supply eventually increases by $200 million.
B) Bank reserves decrease by $20 million, and the money supply eventually increases by $200 million.
C) Bank reserves increase by $20 million, and the money supply eventually decreases by $200 million.
D) Bank reserves decrease by $20 million, and the money supply eventually decreases by $200 million.