Question

12: Suppose a hypothetical economy that uses a chequeable-deposits-only monetary system has a required reserve ratio of 10%. When the central bank in this economy sells $10 million worth of Treasury bills, this will decrease the money supply by Select one:

a. $100 million.

b. $1 million.

c. $10 million.

d. 10%.

Answer 1

Ans. = (Option A) $100 Million

Change in Money Supply = Change in Reserves × Money Multiplier

Money Multiplier:
= 1/ Required Reserves Ratio
= 1/ 0.10
= 10

Change in Reserves = $10 Million

(as the Central Banks sold the $10 Million worth of Treasury Bills to the Commercial Banks. So, as banks would have to pay, their money lending Capacity would reduce.)

Change in Money Supply:
= Change in Reserves × Money Multiplier

= $10 Million × 10
= $100 Million

So, Decrease in Money Supply would be equal to $100 Million.

_______________________________________

Please UPVOTE if you find this Answer Helpful and Post your Doubts (if any) in the comment section.

Thanks
_______________________________________