Hi,

Could you help me and see if my work is correct?

Assume that the banking system is loaned up and that any open-market purchase by the Fed directly increases reserves in the banks. If the required reserve ratio is 0.2, by how much could the money supply expand if the Fed purchased $2 billion worth of bonds?

Using the divide multiplier:

Finding the deposit multiplier:

Dividing 1 by the required reserve ratio

1/0.02

= 5

Now taking the purchase amount of 2 billion and multiply that by 5

2 billion * 5 = 10 billion

The money supply will expand to $10 billion.