Question

A bank will often hold government securities as an asset. If a bank were to sell S500,000 in government securities to an individual who paid for the bond in cash and the bank placed this cash in its vault, by how much would the money supply change as a result? a. It would increase by $500,000 multiplied by the reciprocal of the required reserve ratio. b. It would decrease by $500,000 multiplied by the reciprocal of the required reserve ratio. c. There would be no change to the money supply. d. It would increase by $500,000. e. It would decrease by $500,000.

Answer 1

Answer:

It would decrease by $500,000 multiplied by the reciprocal of the required reserve ratio

Explanation:

The Federal Reserve (Fed) buys and sells government securities to control the money supply. This activity is called open market operations (OPO). ... To increase the money supply, the Fed will purchase bonds from banks to inject money into the banking system.

Conversely, the money supply decreases when the Fed sells a security