Question

If the reserve ratio is 5 percent, banks do not hold excess reserves, and people do not hold currency, then when the Fed sells $20 million worth of government bonds, bank reserves
decrease by $20 million and the money supply eventually decreases by $100 million.
increase by $20 million and the money supply eventually increases by $400 million.
decrease by $20 million and the money supply eventually decreases by $400 million.
increase by $20 million and the money supply eventually increases by $100 million.
decrease by $20 million and the money supply eventually decreases by $400 million.

Answer 1

The correct option is: decrease by $20 million and the money supply eventually decreases by $400 million.; if the reserve ratio is 5 percent, banks do not hold excess reserves.

Define the term reserve ratio?

The amount of reservable liabilities than commercial reserve requirement onto rather than lend off and invest is known as the reserve ratio.

The central bank of the nation, in this case the Federal Reserve in the United States, sets this criterion. It is often referred to as the ratio of cash reserves.

The amount of money that banks are required to hold with the Reserve Bank of India as a percentage of their Net Time and Demand Liabilities is known as the Cash Reserve Ratio (NDTL).

The goal of CRR is to guarantee the banks' solvency and liquidity.

Thus, if a reserve ratio is 5%, banks do not store extra reserves, and people must not hold currency, the money supply will eventually fall by $400 million and by $20 million.

To know more about the reserve ratio, here

brainly.com/question/13758092

#SPJ4