Assuming that the Federal Reserve Banks sell $40 million in government securities to commercial banks and the reserve ratio is 20 percent, then the effect will be to reduce

Question

Quizplus · Accepted Answer

The sale of $40 million in government securities reduces reserves by $40 million. With a reserve ratio of 20%, the money multiplier is 5 (1/0.20). Thus, the potential reduction in the money supply is $40 million * 5 = $200 million.

Assuming That the Federal Reserve Banks Sell $40 Million in Government