Question

The Federal Reserve decides to sell $100 million in government debt to households paying with checkable deposits. The current reserve requirement is 20%. Instructions: Enter your answer as a whole number. a. The Fed's decision will lead to (Click to select) reserves in the banking system and (Click to select) checkable deposits. b. The money supply will (Click to select) by a maximum of $ million. g

Answer 1

Answer and Explanation:

The computation is shown below:

1. a) fewer; less checkable deposits

As if the government securities are sold so it reduce the reserves and the bank checkable deposits

b) decreases; $500 million

 As if the government securities are sold by the Fed that reduced the money supply

Here it is a reduction of

= 1 ÷ Required reserve ratio × Selling price of securities

= 1 ÷ 0.20 × 100

= $500 million