Question

Suppose that the reserve requirement for checking deposits is 10 percent and that banks do not hold any excess reserves. if the fed sells $1 million of government bonds, the economy's reserves by $ million, and the money supply will by $ million.

Answer 1

$10 million.

Step-by-step explanation:

1. A ratio required by the reserve is the ratio of 10% and without excess reserves, we have the money multiplier as 1/.10 = 10. Assuming

the Fed sells bonds of $1 million, the reserves will decrease by $1 million and the money supply will contract by 10 x $1 million = $10 million.

2. Sometimes, the banks may wish to hold it excess reserves, assuming they need to hold the reserves for the use of their day-to-day transaction, which includes, making change, paying other banks for customers' transactions, cashing paychecks and others. Assuming banks increase excess reserves such that there will be no overall change in the total reserve ratio, that mean that the money multiplier will not change and there will not be effect on the supply of money.