In the simple deposit expansion model,a decline in checkable deposits of $500 when the required reserve ratio is equal to 20 percent implies that the Fed

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In the deposit expansion model, a change in reserves leads to a multiplied change in deposits. With a 20% reserve ratio, the money multiplier is 5 (1/0.20). A $500 decline in deposits implies a $100 decline in reserves ($500/5). Therefore, the Fed must have sold $100 in government bonds to reduce reserves by $100.

In the Simple Deposit Expansion Model,a Decline in Checkable Deposits