The reserve requirement is 10%. If The Federal reserve sells $29 million worth of government securities,...?

Question

then the money supply can
A. increase by $2.9 million
B. decrease by $2.9 million
C. increase by $290 million
D. decrease by $290 million
E. increase by $29 million

Answer 1

E. increase by $29 million

Answer 2

I think that the money supply would actually decrease in this question. The would be because when the government sell securties it is taking money out of the market. Therefore the money supply shrinks. I think that with that reserve requirement I would say that it would decrease by 290 million because that is the only answer that would make sense if it decreased. It would have to decrease by more then 29 million. Let me know if you want more information.

Answer 3

The money multiplier would be (1/10%) or 10 times.
If the FED sells $29 million of securities, these securities are being bought with money, so it is money being pulled out of the economy.
since the money multiplier is 10 times, the reduction would be 29x10= 290

So the answer is D