Assume the required reserve ratio is 10 percent and the FOMC orders an open-market sale of $50 million in government securities from member banks.If the oversimplified money multiplier is assumed, then the money supply will
A)increase by $500 million.
B)increase by $100 million.
C)decrease by $100 million.
D)decrease by $500 million.

Question

Quizplus · Accepted Answer

The oversimplified money multiplier is 1/required reserve ratio. In this case, the oversimplified money multiplier would be 1/0.10 = 10. An open-market sale of $50 million in government securities from member banks will decrease bank reserves by $50 million, causing a contraction of the money supply by $50 million * 10 (the oversimplified money multiplier) = $500 million. Therefore, the correct answer is D.

Assume the Required Reserve Ratio Is 10 Percent and the FOMC