The Federal Reserve decides to sell $50 million in government debt to households paying with checkable...

The Federal Reserve decides to sell $50 million in government debt to households paying with checkable deposits. The current reserve requirement is 5%.

a. The Fed decision will lead to [more fewer the same ] reserves in the banking system and [ more less the same ] money in circulation.

b. The money supply will [increase decrease remain the same] by a maximum of [$ million.]

Expert Solution

Solution:-

The action taken by the Federal Reserve will lead to fewer reserves in the Banking system. This will result in less money in circulation

The decrease in Money supply = 1/Required reserve ratio x Selling of securities

= 1/0.05 x 50

= 20 * 50 million

= 1000 million

Rahul Sunny answered 3 months ago

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