Assume there is no leakage from the banking system and that all commercial banks are loaned up. The required reserve ratio is 25%. 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, it effectively removes that amount from the banking system. With a 25% reserve ratio, banks could have supported up to 4 times that amount in loans due to the money multiplier effect (1/0.25 = 4). Therefore, the reduction in the money supply is 4 times $5 million, which equals $20 million.

Assume There Is No Leakage from the Banking System and That