Answer:
The maximum amount the money supply could increase is $100 million
The smallest possible increase is $10 million.
Explanation:
When the required reserve ratio is 10 percent or 0.10, then the money multiplier is (1 / required reserve ratio) or (1 / 0.10) = 10.
Now, change in money supply = money multiplier * open market purchase of government bonds.
the Federal Reserve consucts a $10 million open market purchase of government bonds.
As a result of this,
Money Supply increases by (10*$10 million) = $100 million. This is the maximum amount the money supply could increase.
if the bank holds, $10 million as excess reserves, then money supply could increase by as much as $10 million. This is the smallest amount the money supply could increase.
If the required reserve ratio is 10 percent, the largest possible increase in the money supply that could result is $100 million, and the smallest possible increase is $10 million.
