If the Federal Reserve sells $1,000 in bonds and,as a result,the money supply decreases by $2,500,what is the required reserve ratio?

Question

Quizplus · Accepted Answer

The required reserve ratio is the ratio of required reserves to deposits. In this case, the sale of bonds by the Federal Reserve reduces the money supply by $2,500. This means that banks have $2,500 less in deposits. If the required reserve ratio is 0.4, then banks are required to hold $1,000 in reserves (0.4 * $2,500). This is the same amount of bonds that the Federal Reserve sold. Therefore, the required reserve ratio is 0.4.

If the Federal Reserve Sells $1,000 in Bonds And,as a Result,the