Question

Assume that banks lend out all their excess reserves and individuals deposit all their money. If the Required Reserve Ratio is .14, what will happen to the supply of money if the Fed SELLS $10 billion worth of bonds through an Open Market Operation?

Select one:

a. It would decrease by $71.4 billion

b. It would increase by $54.7 billion

c. It would decrease by $44.2 billion

d. It would increase by $22.8 billion

e. It would decrease by $15 billion

Answer 1

Here fed sold bonds through Open market operation thus they have withdrawn money from the economy.

$\large Money multiplier = \frac{1}{Reserve ratio}$

Therefore, supply of money will decrease by $10billion/0.14

= $ 71.42 billion

A. It would decrease by $ 71.4 billion

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