If the Fed buys $1 million of the U.S. government securities, the money supply will increase by $9 million. This is because banks can create $9 million in new loans (assuming a 10% reserve ratio) for every $1 million in reserves and this will lead to increase in the money supply by $9 million.
An additional 10% of their deposits as reserves will also be required by banks to hold, as there is increase in the reserve ratio from 10% to 20 %, meaning they can only create $8 million in new loans from the same $1 million in reserves. Therefore, the money supply increases by $9 million when the Fed buys the U.S. government securities.
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