If all banks are subject to a uniform 25% 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

Question

Quizplus · Accepted Answer

An open market sale by the Fed involves selling securities, which decreases bank reserves and, by the money multiplier effect (1/reserve requirement = 1/0.25 = 4), decreases the money supply by 4 times the amount of the sale, hence $4,000.

If All Banks Are Subject to a Uniform 25% Reserve