Answer:
1) Largest possible increase is $100 million
2) Smallest possible increase is $10 million
Explanation:
1) In order to find the largest possible increase in the money supply we need to find the money multiplier. The formula for money multiplier is 1/reserve ratio so the money multiplier is 1/0.1= 10. So if the fed conducts an open market purchase of $10 million the maximum amount that the money supply can increase is million * multiplier = 10 million *10 = $100 million, however this will only be the case if the bank decides to keep 0 excess reserves, if the bank decides to keep any excess reserves the money supply increase will be less than a $100 million.
2) The lowest amount that the money supply can increase by is $10 million because if the bank decides to keep all of this money in reserve and loan none of this than the money supply will only increase by $10 million.
