How will the purchase of $100 million of government securities by the Federal Reserve change bank reserves and total checking account deposits in the banking system as a whole? Assume that banks do not hold any excess reserves, that households and

firms do not change the amount of currency they hold, and that the required reserve ratio is 20 percent.

Bank reserves will increase by $100 million when the seller of the bond deposits the $100 million in its checking account. Total checking account deposits in the banking system as a whole will increase by $500 million—the $100 million increase in reserves times the simple deposit multiplier of 5.