If all banks are subject to a uniform 20% reserve requirement and demand deposits are the only form of money,a $1,000 open market sale by the Fed would cause the money supply to

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Quizplus · Accepted Answer

An open market sale by the Fed involves selling securities, which in turn reduces the reserves of the banking system. With a 20% reserve requirement, every dollar of reserves supports $5 of deposits. Therefore, a $1,000 reduction in reserves leads to a $5,000 decrease in the money supply.

If All Banks Are Subject to a Uniform 20% Reserve