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Setler [38]
3 years ago
8

Assume that the reserve requirement is 10 percent. Also assume that banks do not hold excess reserves and there is no cash held

by the public. The Federal Reserve decides that it wants to contract the money supply by $50 million using open-market operations.In order to accomplish its goal, the Fed needs to
Business
1 answer:
Marina86 [1]3 years ago
8 0

Answer:

In order to accomplish its goal, the Fed needs to sell $5 million value of bonds.

Explanation:

First, we need to calculate the value of the bonds

Value of bond = Amount of Money supply x Reserve requirement rate

Where

Amount of Money supply = $50 million

Reserve requirement rate = 10%

Placing values in the formula

Value of bond = $50 million x 10%

Value of bond = $5 million

To increase the money supply the bonds are needed to be sold in the market.

Hence, In order to accomplish its goal, the Fed needs to $5 million value of bonds.

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