Question

Answer the question on the assumption that the legal reserve ratio is 20 percent. suppose that the fed sells $500 of government securities to commercial banks (paid for out of commercial bank reserves) and buys $500 of securities from individuals, who deposit the cash in checking accounts. as a result of the given transactions, the supply of money in the economy will

Answer 1

The sale and purchase of government securities by the Fed would leave reserves unchanged.

What is the effect of the purchase and sale of government securities?

The Fed is the Central Bank of the United States. One of the duties of the Fed is to conduct monetary policies. Monetary polices are used to affect the level of money supply in the economy.

One of the monetary policy tools of the Fed is open market operation. When the Fed sells government securities, it is known as an open market sales which reduce money supply. When the Fed buys government securities, it is known as an open market purchase which increases money supply.

Reserve ratio is the percentage of deposits that is required of commercial banks to keep as reserves. Reserve ratio is determined by the Fed.

Change in reserve = (  value of government securities bought / reserve ratio) - (value of government securities sold / reserve ratio)

($500 / 0.2) - (500 / 0.2)  = 0

To learn more about reserve ratio, please check: brainly.com/question/6831267

#SPJ1