Answer:
(C) $2,000 billion.
Step-by-step explanation:
The maximum increase in the money supply is determined by the money multiplier formula, which is:
money multiplier = 1 / reserve requirement
In this case, the reserve requirement is 20%, or 0.2, so the money multiplier is:
money multiplier = 1 / 0.2
= 5
This means that for every dollar of reserves, the banking system can create up to $5 of new money. Since the central bank bought $400 billion worth of government securities, this means that the banking system now has an additional $400 billion in reserves that it can use to create new money. Therefore, the maximum increase in the money supply is:
maximum increase in money supply = money multiplier x increase in reserves
= 5 x $400 billion
= $2,000 billion
Therefore, the answer is (C) $2,000 billion.