Suppose the Federal Reserve wants to decrease the money supply by $100,000. If t

Question

Suppose the Federal Reserve wants to decrease the money supply by $100,000. If the required reserve ratio is 0.1, how much bonds does it have to sell to achieve its goals?

Qn: How do I make use of the required reserve ratio in this question? Why cant the answer be 100,000 since thats what they want to decrease it by? Suppose the Federal Reserve wants to decrease the money supply by $100,000. If the required reserve ratio is 0.1, how much bonds does it have to sell to achieve its goals?

Qn: How do I make use of the required reserve ratio in this question? Why cant the answer be 100,000 since thats what they want to decrease it by?

Qn: How do I make use of the required reserve ratio in this question? Why cant the answer be 100,000 since thats what they want to decrease it by?

Explanation / Answer

if Federal reserve wants to decrease the money supply by $100000 , and required reserve ratio is 0.1 .

we know that simple money multiplier= 1/ RRR = 1/0.1 = 10

amount to decrease the money supply = 100000 / 10 = 10000

Therefroe, if Fed want to decrease the money supply by $100000 , then it have to sell bonds in open market by about $10000.

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