Question 20 Suppose the Fed purchases 100 worth of Treasury

Question 20
Suppose the Fed purchases $100 worth of Treasury bonds. Suppose also that the required reserve ratio is 10%. How much deposits will be created in the banking system?
A. $100
B. Less than $100
C. At most $1,000
D. More than $1,000
E. None of the above

Solution

Maximum amount of New deposit created = New treasury bonds / Reserve ratio

= $100 / 0.1

= $1000

Correct option (C).