Question

In a fractional-reserve banking system with no excess reserves and no currency holdings, if the central bank buys $100 million worth of bonds?

Answer 1

reserves increase by $100 million and the money supply increases by more than $100 million.

Explanation:

Consider the provided information.

It is given that central bank buys $100 million worth of bonds, that means an amount of $100 million in the deposits account of the account holders.

Therefore the reserves increase by $100 million.

It is also given that there are no excess reserves, it means banks can lend the reserves and that will increase the money supply by more than $100 million.

Hence, reserves increase by $100 million and the money supply increases by more than $100 million.