Question

The reserve requirement is​ 10%. Suppose that the Fed ​$ worth of U.S. government securities a bond​ dealer, electronically the​ dealer's deposit account at Reliable Bank. Which of the following correctly describes the immediate effect of this​ transaction? A. The total reserves of Reliable Bank by ​$. B. The excess reserves of Reliable Bank by ​$. C. The required reserves of Reliable Bank by ​$. D. Reliable Bank

Answer 1

Answer:

D. The money supply decreases by ​$150,000.

Explanation:

Note: This question is not complete as some figures are omitted. The full question is therefore presented first before answering the question as follows:

The reserve requirement is​ 10%.

Suppose that the Fed sells ​$150,000 worth of U.S. government securities from a bond​ dealer, electronically debiting the​ dealer's deposit account at Reliable Bank.

Which of the following correctly describes the immediate effect of this transaction on the money​ supply?

A. The money supply decreases by ​$1,500,000

B. The money supply decreases by ​$135,000.

C. There is no change in the money supply.

D. The money supply decreases by ​$150,000.

E. None of the above.

The explanation to the answer is now provided as follows:

This is an example of Open market operations (OMO).

Open market operations (OMO) is a monetary policy strategy in which the central bank such as the Federal Reserve sells or purchases government securities in order to implement a particular monetary policy.

When the central bank sells government securities on the open market, it aims to reduce the money supply by the worth of the securities. This is called a contractionary monetary policy.

On the other hand, when the central bank purchases government securities on the open market, it aims to increase the money supply by the worh of the government securities. This is called an expansionary monetary policy.

From the question, the sale of ​$150,000 worth of U.S. government securities from a bond​ dealer is a contractionary monetary policy and it will reduce the money supply by exactly $150,000.

Therefore, the correct option is D. The money supply decreases by ​$150,000.