Question

If the reserve requirement is 10 percent and the central bank sells 10,000 in government bonds on the open market, the money supply will:_________

Answer 1

If the reserve requirement is 10 percent and the central bank sells 10,000 in government bonds on the open market, the money supply will decrease by a maximum of $100,000.

What is Reserve Requirement?

• The amount of money that a bank must have in reserve in order to pay its obligations in the event of unforeseen withdrawals is known as the reserve requirement.
• The central bank uses reserve requirements as a tool to alter the amount of money in the economy and affect interest rates.
• Based on a portion of the cash that customers have on hand, banks lend them money.
• In exchange for this power, the government imposes one obligation on them to maintain a minimum balance of deposits to cover potential withdrawals.
• The reserve requirement is the amount that banks must hold in reserve and are not permitted to lend above.

To learn more about reserve requirement with the given link

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