Question

If the fed sells $5 billion of u. S. Bonds in the open market and the reserve requirement is 5 percent, m1 will eventually:.

Answer 1

If the fed sells $5 billion of u. S. Bonds in the open market and the reserve requirement is 5 percent, m1 will eventually decrease by $100 billion.

What is the effect of the sale of bonds on M1?

M1 is comprised of the most liquid money supply e.g. currency, demand deposits.  When the Fed sells bonds they are conducting a contractionary monetary policy. The aim of this policy is to reduce the supply of money in the economy.

Reduction in the value of money = value of bonds sold / reserve requirement

$5 billion /0.05 = $100 billion.

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