One alternative way (from the formula on p. 418 or 19-4a in the digital textbook

Question

One alternative way (from the formula on p. 418 or 19-4a in the digital textbook) to calculate the total change in money supply when the Fed injects money into the economy or takes away money from the economy is the amount of money injected or taken away by the Fed times the money multiplier. In a simplified banking system in which all banks are subject to a 20% required reserve ratio, a sale of $10,000 government securities by the Fed would cause the money supply to              

A.   decrease by $50,000.     B.   increase by $50,000.     C.   decrease by $100,000.     D.   increase by $100,000.     E.   none of the above.

Explanation / Answer

1 / ( 20/100) = 5

5 * 10000 = 50000

Sale implies decrease

A. decrease by $50,000.

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