If the required reserve ratio is 20 percent,banks loan out all excess reserves,people hold no currency,and the Fed sells $5,000 worth of bonds to banks,what is the ultimate impact on the money supply?

Question

Quizplus · Accepted Answer

The sale of bonds by the Fed reduces the bank reserves by $5,000*0.2 = $1,000. As banks loan out excess reserves, $1,000/0.2 = $5,000 of loans will be called back. This reduction in loans will decrease the money supply by $5,000.

If the Required Reserve Ratio Is 20 Percent,banks Loan Out