Use the following to answer questions :
-(Scenario: Assets and Liabilities of the Banking System) Look at the scenario Assets and Liabilities of the Banking System. Suppose that the reserve ratio is 10% and the Federal Reserve sells $11,000 worth of U.S. Treasury bills to the banking system. If the banking system does NOT want to hold any excess reserves, _____ will be _____ the money supply.

Question

Use the following to answer questions : 
-(Scenario: Assets and Liabilities of the Banking System) Look at the scenario Assets and Liabilities of the Banking System. Suppose that the reserve ratio is 10% and the Federal Reserve sells $11,000 worth of U.S. Treasury bills to the banking system. If the banking system does NOT want to hold any excess reserves, _____ will be _____ the money supply.

Quizplus · Accepted Answer

Since the reserve ratio is 10%, the banking system will be required to hold $1,100 in reserves (10% of the $11,000). If the banking system does not want to hold any excess reserves, then the remaining $9,900 will be loaned out in the form of new deposits. This means the money supply will increase by $9,900. However, since the Federal Reserve sold $11,000 worth of Treasury bills, which are assets of the banking system, the banking system will need to reduce its assets by $11,000. This reduction in assets will be achieved by reducing its deposits, which means the money supply will decrease by $11,000. Therefore, the overall effect on the money supply will be an increase of $9,900 minus a decrease of $11,000, which results in a net decrease of $1,100. This means that the correct answer is B) $110,000; subtracted from.

Use the Following to Answer Questions