Question

Suppose that the reserve ratio is 10% when the Fed sells $25,000 of U.S. Treasury bills to the banking system. If the banking system does NOT want to hold any excess reserves, _______ will be _______ the money supply. a $110,000; added to b $110,000; subtracted from c $25,000; subtracted from d $250,000; subtracted from e $250,000; added to

Answer 1

d $250,000; subtracted from

Step-by-step explanation:

Sales of U.S. Treasury bills to the banking system by the Fed is a contractionary monetary policy that will reduce the money supply.

Based on the money supply multiplier, the amount of the reduction in money can be calculated as follows:

Amount of reduction in money supply = $25,000 / 10% = $250,000.

Therefore, if the banking system does NOT want to hold any excess reserves, 250,000 will be substracted from the money supply.