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AnnZ [28]
4 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]4 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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