Assume the reserve ratio is 25 percent and federal reserve banks buy $4 million of u. s. securities from the public, which deposits this amount into checking accounts. as a result of these transactions, the supply of money is:

Given that,

Reserve ratio = 25%

Fed reserve bank buys (securities) from public = $4 million

and public deposits this amount into checking account

Therefore, Initial deposits = $4 million

The supply of money is directly increases by $4 million.

and

Money creating potential of banks = Initial Deposits ×

                                                          = 4 ×

                                                          = 4 × 3

                                                          = $12 million

Hence, money creating potential of the banks is increased by $12 million.

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