Question

The reserve ratio is 20% for the banking system below. If the Federal Reserve sells $50,000 of Treasury bills to the banking system, then the money supply will decrease by $_____.

Answer 1

$250,000

Step-by-step explanation:

The effect of a change in the money supply is given by the following equation: money increase/decrease x money multiplier

the money multiplier = 1/reserve ratio = 1/20% = 5

so the net effect of this transaction = -$50,000 x 5 = -$250,000