In a simple money supply model, if the Fed sold $400 million in government securities, determine...
In a simple money supply model, if the Fed sold $400 million in government securities, determine the size and direction of the maximum money supply in the banking system assuming the required reserve ratio is 12%. (Increase vs. decrease and how much)
Homework Answers
Answer
The sell of bonds decreases the money supply because the money goes to Fed and the bonds come into the market.
the decrease in money supply=amount of sell/reserve ratio
=400/0.12
=3333.33333
=3333 million
the money supply will decrease by $3333 million
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