Question

A bank will often hold government securities as an asset. If a bank were to sell $100,000 in government securities to an individual who paid for the bond in cash and the bank placed this cash in their vault, by how much would the money supply change as a result

Answer 1

Answer:

e. It would decrease by S100,000.

Explanation:

Options are "a. It would increase by $100,000 multiplied by the reciprocal of the required reserve ratio. b. It would decrease by $100,000 multiplied by the reciprocal of the required reserve ratio. c. There would be no change to the money supply. d. It would increase by $100,000. e. It would decrease by $100,000."

An individual paid cash in exchange of bond to bank and bank has that cash in its vault. Now, the bank sells securities worth $100,000 to that individual. In this case, the cash at bank will decrease by the amount of securities, that is $100,000 and the money supply also reduce by the same amount of $100,000.