Assume there is no leakage from the banking system and that all commercial banks are loaned up. Suppose the reserve ratio is 25%. When the Fed buys $40m of bonds from the public who then deposit the proceeds into the banking system,
A. bank reserves increase by $40 million and money supply could increase by a maximum of $40 million.
B. bank reserves increase by $40 million and the money supply could increase by a maximum of $160 million.
C. bank reserves decrease by $40 million and money supply could decrease by a maximum of $40 million.
D. bank reserves decrease by $40 million and money supply could decrease by a maximum of $160 million.
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