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AnnZ [28]
3 years ago
6

If the reserve ratio is 15 percent, and banks do not hold excess reserves, and people hold only deposits and no currency, then w

hen the Fed sells $25.5 million worth of bonds to the public, bank reserves
A. increase by $25.5 million and the money supply eventually increases by $382.5 million.
B. decrease by $25.5 million and the money supply eventually decreases by $170 million.
C. increase by $25.5 million and the money supply eventually increases by $170 million.
D. decrease by $25.5 million and the money supply eventually decreases by $382.5 million.
Business
1 answer:
8090 [49]3 years ago
7 0

Answer:

Option (B) is correct.

Explanation:

Given that,

Required reserve ratio = 15 percent

Bonds sell to public = $25.5 million

Bank reserves decreases by $25.5 million because of the purchasing of bonds from the Fed.

Money multiplier:

= 1/Required reserve ratio

= 1/0.15

= 6.67

Therefore, the money supply decreases by:

= Money multiplier × $25.5 million

= 6.67 × $25.5 million

= $170 million

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<h3>What does the federal reserve system do?</h3>

The federal reserve system of the United States is the central bank of the nation and as such, they engage in services like check clearing and regulating the money supply.

They also act as a lender of last resort to banks in order to ensure that they don't fail. The Fed does not lend money to consumers directly so this is not one of their roles.

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