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Assume that the reserve requirement is 10 percent. Also assume that banks do not hold excess reserves and there is no cash held by the public. The Federal Reserve decides that it wants to contract the money supply by $50 million using open-market operations. In order to accomplish its goal, the Fed needs to sell or buy ________$ million worth of bonds.

Respuesta :

Answer:

$5 million

Explanation:

Open market operations is a monetary policy instrument used by the central bank of a nation to control the money supply in an economy. So, if  Fed wants to contract the money supply then it must sell the bonds in the market.

Reserve requirement = 10%

Multiplier = 1 ÷ Reserve requirement

                = 1 ÷ 10%

                = 10

So, in order to contract the money supply by $50 million, the amount of bonds needs to be sold will be $50/10 = $5 million.

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