If the Fed sells $7.5 billion of U.S.bonds in the open market and the reserve requirement is 15 percent,M1 will eventually

Question

Quizplus · Accepted Answer

When the Fed sells $7.5 billion of U.S. bonds in the open market, it withdraws $7.5 billion from the economy. However, due to the reserve requirement of 15%, this withdrawal will have a multiplier effect on the money supply. Specifically, a $7.5 billion reduction in reserves will eventually result in a $50 billion reduction in M1 money supply (calculated as the inverse of the reserve requirement, multiplied by the initial withdrawal). Therefore, choice A is the correct answer.

If the Fed Sells $7