Asked by Kathleen Julito on Jul 12, 2024
Verified
If all banks are subject to a uniform 25% reserve requirement and demand deposits are the only form of money,a $1,000 open market sale by the Fed would cause the money supply to
A) increase by $1,000.
B) decrease by $1,000.
C) decrease by $4,000.
D) increase by $4,000.
Reserve Requirement
The reserve requirement is a central banking regulation that sets the minimum amount of reserves that must be held by a commercial bank, not to be loaned out, to ensure bank liquidity and stability.
Open Market Sale
The sale of government bonds by the central bank to reduce the money supply in the economy.
Money Supply
The complete sum of available financial resources in an economy, including cash, coins, and the funds available in checking and savings accounts, at a particular instant.
- Evaluate the consequences of Federal Reserve policies on the supply of money.
Verified Answer
TH
Tatiana HilarioJul 16, 2024
Final Answer :
C
Explanation :
An open market sale by the Fed involves selling securities, which decreases bank reserves and, by the money multiplier effect (1/reserve requirement = 1/0.25 = 4), decreases the money supply by 4 times the amount of the sale, hence $4,000.
Learning Objectives
- Evaluate the consequences of Federal Reserve policies on the supply of money.