If the required reserve ratio in the banking system is 20% and the Fed sells $1,000 in U.S. bonds, what will happen to supply?

Question

Quizplus · Accepted Answer

When the Fed sells $1,000 in U.S. bonds, the reserves of the banking system decrease by $1,000 x 0.20 = $200. This means that banks can only lend out $800, so the money supply decreases by $1,000 - $200 = $800. Therefore, the correct answer is B) It will decrease by as much as $5,000 (since the money supply could potentially decrease by up to $5,000).

If the Required Reserve Ratio in the Banking System Is