The Fed buys $20,000 of government securities. The desired reserve ratio is 5 percent and the currency drain is zero. What will be the change in the quantity of money?

The answer is $400,000

Explanation:

Quantity theory of money states that the quantity of money is directly proportional total spending in an economy.

Change in quantity of money = new deposits (which can also be new security) : reserve requirements

The new security is $20,000

reserve requirements is 5 percent

Change in quantity of money is:

$20,000 / 0.05

=$400,000