Final answer:
To decrease the money supply by $25 billion with a money multiplier of 10, the required change in excess reserves is $2.5 billion.
Step-by-step explanation:
When considering the adjustments needed for the money supply to achieve full employment, we employ the concept of the money multiplier. The money multiplier is a factor by which the initial change in reserves alters the total money supply in the banking system.
In this case, given the money multiplier is 10, to decrease the money supply by $25 billion, we need to understand how much the excess reserves in the banking system must change.
The required change in excess reserves can be calculated by taking the desired change in money supply and dividing it by the money multiplier. Therefore, to decrease the money supply by $25 billion with a multiplier of 10, the banks need to reduce their excess reserves by:
Total Change in Money Supply / Money Multiplier = Required Change in Excess Reserves:
$25 billion / 10 = $2.5 billion
This means that the required change in excess reserves is $2.5 billion to shrink the money supply by $25 billion and move the economy towards full employment.
Therefore, the correct answar is A) $2.5 billion