Question

Assume there is no leakage from the banking system and that all commercial banks are loaned up. The required reserve ratio is 10%. If the Fed buys $10 million worth of government securities from the public, the change in the money supply will be________$.

Answer 1

Answer:

A) -$10 million.

Explanation:

44) Multiplier = 1 / Reserve ratio = 1 / 0.10 = 10

Since Fed is selling securities to the public, money supply shrinks with the multiplier effect. That is, money supply is reduced by (-) 10 times .

Chang in the money supply will be: $10 million x (-10) = -$100 million