Assume there is no leakage from the banking system and that all commercial banks are loaned up. The required reserve ratio is 16%. If the Fed sells $5 million worth of government securities to the public, the change in the money supply will be

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When the Fed sells $5 million worth of government securities to the public, this action takes $5 million out of the banking system. With a required reserve ratio of 16%, banks must hold 16% in reserves and can loan out the remaining 84%. The money multiplier is 1 / reserve ratio = 1 / 0.16 = 6.25. Therefore, the decrease in the money supply is $5 million * 6.25 = $31.25 million.

Assume There Is No Leakage from the Banking System and That