Question

Assume that the reserve requirement for demand deposits is 20 percent, that banks hold no excess reserves, and that the public holds no currency. If the central bank sells $10,000 worth of government securities to commercial banks, the total money supply will

Answer 1

The right solution is "decrease by $50,000". A further explanation is description if provided below.

Step-by-step explanation:

The given values:

Sell amount,

= 10,000

Reserve ratio,

= 20%

i.e.,

= 0.2

Now,

The decrease in money supply will be:

=
`(Sell \ amount)/(Reserve \ ratio)`

On substituting the values, we get

=
`(10000)/(0.2)`

=
`50,000` ($)