Answer the question on the basis of the given consolidated balance sheet of the

Question

Answer the question on the basis of the given consolidated balance sheet of the commercial banking system. Assume that the reserve requirement is 10 percent. All figures are in billions.

Suppose the Fed wants to reduce the money supply by $400 billion to drive up interest rates and dampen inflation. Assuming that the money multiplier is operating to full effect, to accomplish the desired reduction, the Fed could

sell $40 billion of U.S. securities to the banks.

buy $20 billion of U.S. securities from the banks.

sell $20 billion of U.S. securities to the banks.

buy $40 billion of U.S. securities from the banks.

Assets Liabilities & Net Worth Reserves $60 Checkable Deposits $600 Securities 140 Stock Shares 260 Loans 260 Property 400

Explanation / Answer

sell $40 billion of U.S. securities to the banks.

The above should be the answer..

because money multipler is=1/10%=10, so by selling 40 billion US securities the money will be out of the market by =10*40=400 billion

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