If the Federal Reserve sells $200 of securities through a commercial bank when the reserve requirement is 10 percent, the maximum potential change in the money supply is

Question

Quizplus · Accepted Answer

When the Federal Reserve sells securities, it decreases the reserves of the banking system, leading to a decrease in the money supply. With a 10 percent reserve requirement, every dollar of reserves supports $10 of deposits. Therefore, reducing reserves by $200 could potentially decrease the money supply by 10 times that amount, or $2,000.

If the Federal Reserve Sells $200 of Securities Through a Commercial