Suppose the Reserve Ratio Is 20 Percent, and Banks Do

Multiple Choice

Suppose the reserve ratio is 20 percent, and banks do not hold excess reserves. Under these circumstances, suppose the Bank of Canada sells $40 million of bonds to the public. Which of the following best describes the effects of this open market operation?

A) Bank reserves increase by $40 million, and the money supply eventually increases by $200 million.
B) Bank reserves increase by $40 million, and the money supply eventually increases by $800 million.
C) Bank reserves decrease by $40 million, and the money supply eventually decreases by $200 million.
D) Bank reserves decrease by $40 million, and the money supply eventually decreases by $800 million.