Assuming that the Federal Reserve Banks sell $40 million in government securities to commercial banks and the reserve ratio is 20 percent, then the effect will be to reduce:

Question

Quizplus · Accepted Answer

When the Federal Reserve sells $40 million in government securities, it reduces the reserves of commercial banks by that amount. With a reserve ratio of 20%, the money multiplier is 1/0.2 = 5. Therefore, the potential reduction in the money supply is $40 million * 5 = $200 million.

Assuming That the Federal Reserve Banks Sell $40 Million in Government