Suppose the Fed purchases $100 million of U.S. securities from security dealers.

Question

Suppose the Fed purchases $100 million of U.S. securities from security dealers. If the reserve requirement is 20 percent, the currency holdings of the public are unchanged, and banks have zero excess reserves both before and after the transaction, the total impact on the money supply will be a:

$100 million increase in the money supply.

$100 million decrease in the money supply.

$200 million increase in the money supply.

$500 million increase in the money supply.

1 points   

Question 8

Suppose the Fed sells $100 million of U.S. securities to the security dealers. If the reserve requirement is 20 percent, the currency holdings of the public are unchanged, and banks have zero excess reserves both before and after the transaction, the total impact on the money supply will be a:

$100 million increase.

$100 million decrease.

$500 million decrease.

$500 million increase.

$100 million increase in the money supply.

$100 million decrease in the money supply.

$200 million increase in the money supply.

$500 million increase in the money supply.

Explanation / Answer

1) $100 million increase in the money supply.

2) $100 million decrease.

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