If the actual money multiplier equals the potential money multiplier and if the Fed wishes to reduce the money supply by $1 million when the reserve ratio is 20 percent, then the Fed should

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The reserve ratio is 20%, so the potential money multiplier is 1/0.2 = 5. If the actual money multiplier equals the potential money multiplier, then the money supply will decrease by $1 million if the Fed reduces the monetary base by $200,000 (1/5 x $200,000 = $1 million). The Fed can reduce the monetary base by selling $200,000 of government securities, which will decrease the excess reserves of banks and reduce the amount of loans they can make, leading to a decrease in the money supply.

If the Actual Money Multiplier Equals the Potential Money Multiplier