Suppose the Federal Reserve wants to decrease the money supply by $100,000.If the required reserve ratio is 0.1,which of the following actions will achieve the Fed's goal?

Question

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If the required reserve ratio is 0.1, this means that banks must hold 10% of deposits in reserve. Therefore, for the Fed to decrease the money supply by $100,000, it must decrease the amount of deposits that banks have by $100,000/0.1 = $1,000,000. This can be achieved by selling $10,000 in bonds, as this will decrease the amount of reserves banks have and therefore decrease the amount of loans they can make, leading to a decrease in the money supply. The other choices either do not decrease the money supply by the required amount or result in an increase in the money supply.

Suppose the Federal Reserve Wants to Decrease the Money Supply