22. If the reserve ratio is 15 percent, and banks do not hold excess reserves, a

Question

22. If the reserve ratio is 15 percent, and banks do not hold excess reserves, and people hold only deposits and no currency, then when the Fed sells $25.5 million worth of bonds to the public, bank reserves A. increase by $25.5 million and the money supply eventually increases by $382.5 million. B. decrease by $25.5 million and the money supply eventually decreases by $170 million. C. increase by $25.5 million and the money supply eventually increases by $170 million. D. decrease by $25.5 million and the money supply eventually decreases by $382.5 million.

Explanation / Answer

Ans: D. decrease by $25.5 million and the money supply eventually decreases by $170 million.

Explanation:  $25.5 million sell of bond means bank reserve decrease by $25.5. Then, Multiplier = 1 / RR = 1 / 0.15 = 6.67. Thus, money supply will increase by 6.67 * $25.5 = $170 million.

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