Suppose the Fed conducts an open market sale of $50 million in government securities. If the required reserve ratio is 20%, what is the maximum change in the money supply? Assume that banks try not to hold excess reserves and there is no currency withdrawal from the banking system.
A) maximum increase in money supply = $250 million
B) maximum decrease in money supply = $250 million
C) maximum increase in money supply = $50 million
D) maximum decrease in money supply = $50 million

Question

Quizplus · Accepted Answer

The money multiplier is 1/0.2 = 5. An open market sale decreases reserves by $50 million, leading to a maximum decrease in the money supply of $50 million * 5 = $250 million.

Suppose the Fed Conducts an Open Market Sale of $50