If the Fed sells $10 billion of U.S.bonds in the open market and the reserve requirement is 10 percent,M1 will eventually

Question

Quizplus · Accepted Answer

When the Fed sells $10 billion of U.S. bonds in the open market, the buyers of the bonds pay for them with their reserves. As the reserve requirement is 10 percent, the banks will have to reduce their reserves by $1 billion ($10 billion x 10%) in response to the bond sale. This reduces the banks' ability to make loans, which decreases the money supply. Specifically, it decreases M1 by 10 times the reduction in reserves, or $10 billion x 10 = $100 billion. Thus, the correct choice is C, as M1 will eventually decrease by $100 billion.

If the Fed Sells $10 Billion of U