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If the Bank of Canada buys a $10 million government bond from a member of the public and the reserve ratio is 10%, the maximum possible change in the money supply is:

If the Bank of Canada buys a $10 million government bond from a member of the public and the reserve ratio is 10%, the maximum possible change in the money supply is:

Economics: Private and Public Choice (MindTap Course List)
Economics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN:9781305506725
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Chapter13: Money And The Banking System
Section: Chapter Questions
Problem 18CQ
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reserve ratio= desired reserves/ deposits

money multiplier= change in excess x money multiplier 

excess resrves: cash resseves- desired reserves 

so money multiplier = 1/10%= 10 

wouldn't the answer be 10x 10 million?. I'm so confused on where the 9 million came from. I think it's 10 million - 10%. Please help me explain this question. 

If the Bank of Canada buys a $10 million government bond from a member of the public and the reserve ratio is 10%, the maximum possible change in the money supply is: O an increase of $90 million. Reason: This answer is found by multiplying excess reserves ($9 million) by the money multiplier of 10 (=1/0.10). O an increase of $100 million. Reason: The answer of $90 million is found by multiplying excess reserves ($9 million) by the money multiplier of 10 (=1/0.10). a decrease of $90 million. Reason: In this case, the money supply increases, not decreases. The answer of $90 million is found by multiplying excess reserves ($9 million) by the money multiplier of 10 (=1/0.10). a decrease of $200 million. Reason: In this case, the money supply increases, not decreases. The answer of $90 million is found by multiplying excess reserves ($9 million) by the money multiplier of 10 (=1/0.10).
Transcribed Image Text:If the Bank of Canada buys a $10 million government bond from a member of the public and the reserve ratio is 10%, the maximum possible change in the money supply is: O an increase of $90 million. Reason: This answer is found by multiplying excess reserves ($9 million) by the money multiplier of 10 (=1/0.10). O an increase of $100 million. Reason: The answer of $90 million is found by multiplying excess reserves ($9 million) by the money multiplier of 10 (=1/0.10). a decrease of $90 million. Reason: In this case, the money supply increases, not decreases. The answer of $90 million is found by multiplying excess reserves ($9 million) by the money multiplier of 10 (=1/0.10). a decrease of $200 million. Reason: In this case, the money supply increases, not decreases. The answer of $90 million is found by multiplying excess reserves ($9 million) by the money multiplier of 10 (=1/0.10).
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