Question

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

Answer 1

Ans: Change in money supply = change in resrves (money multiplier)

Money multiplier = 1/Required reserve ratio = 1/10% = 10

Now the govt sells treasure Bills worth $10 million , this means that the Federal Bank reserves will fall down by $10 million as the T-Blls are kept as reserves by the banks and selling them would mean a decline/decrease in reserves by the respective amount.

So change in reserves = - 10

Therefore , Change in money supply = -10 (10)

Change in money supply = -100

Hence , a sale of $10 million T-Bills would decrease the money supply by $100 million.