Question

If the central bank sells $500 in bonds to a bank that has issued $10,000 in loans and is exactly meeting the reserve requirement of 10%, what will happen to the amount of loans and to the money supply in general?

Answer 1

Step-by-step explanation:

For finding out the money supply, first we have to determine the reserve amount which is shown below:

Reserve amount = $10,000 × 10% = $1,000

Out of which $500 was sold

The remaining $500 reflects the decrease in the loan value which affects the money supply also.

The money supply would be computed below

= $500 × 1 ÷ 10%

= $5,000

This money supply would decreased by $5,000