Suppose the Reserve Ratio Is 10 Percent, and Banks Do

Multiple Choice

Suppose the reserve ratio is 10 percent, and banks do not hold excess reserves. Suppose the Bank of Canada sells $10 million of bonds to the public. Which of the following best describes the effects of this open market operation?

A) Bank reserves increase by $1 million, and the money supply eventually increases by $10 million.
B) Bank reserves increase by $10 million, and the money supply eventually increases by $100 million.
C) Bank reserves decrease by $1 million, and the money supply eventually increases by $10 million.
D) Bank reserves decrease by $10 million, and the money supply eventually decreases by $100 million.