If the reserve ratio is 15 percent, and banks do not hold excess reserves, and people hold only deposits and no currency, then when the Fed sells $65 million worth of bonds to the public, bank reserves
A)increase by $65 million and the money supply eventually increases by $266.67 million.
B)increase by $65 million and the money supply eventually increases by $433.33 million.
C)decrease by $65 million and the money supply eventually decreases by $266.67 million.
D)decrease by $65 million and the money supply eventually decreases by $433.33 million.

Question

Quizplus · Accepted Answer

When the Fed sells $65 million worth of bonds, bank reserves decrease by $65 million. With a reserve ratio of 15%, the money multiplier is 1/0.15 = 6.67. Therefore, the money supply eventually decreases by $65 million * 6.67 = $433.33 million.

If the Reserve Ratio Is 15 Percent, and Banks Do