Assume that the reserve requirement is 25%. If the Federal Reserve sells $120 million in government securities to the general pu
blic, the money supply will immediately _____. rev: 06_20_2018 Multiple Choice decrease by $120 million with this transaction, and the decrease in money supply could eventually reach a maximum of $480 million decrease by $120 million with this transaction, and the decrease in money supply could eventually reach a maximum of $360 million increase by $120 million with this transaction, and the increase in money supply could eventually reach a maximum of $480 million increase by $120 million with this transaction, and the increase in money supply could eventually reach a maximum of $360 million
Explanation: The following practice is done by the central bank in the situation of inflation when there is an excess supply of money in the economy.
The central bank tries to decrease the funds by selling the govt bonds to the banks. This results in decrease in funds from banks as they have to buy such bonds from their respective funds.