Assume that the required reserve ratio is 20%. If the Fed sells $10 million worth of government bonds to the public, the maximum change in the money supply will be:

Question

Quizplus · Accepted Answer

When the Fed sells $10 million worth of government bonds, it decreases the reserves in the banking system by $10 million. With a required reserve ratio of 20%, the money multiplier is 1/0.2 = 5. Therefore, the maximum decrease in the money supply is $10 million * 5 = $50 million, which is more than $10 million.

Assume That the Required Reserve Ratio Is 20