16 The FOMC has instructed the FRBNY Trading Desk to sell 25

16 The FOMC has instructed the FRBNY Trading Desk to sell $250 million Treasury securities. The Federal Reserve has set the reserve requirement at 4.75% of transaction deposits. Assume that US banks withdraw all excess reserves and give out loans. What is the full effect of this sale on the money supply? Select one: a. The money supply increases by $11.88 billion b. The money supply decreases by $5.26 billion c. None of the answers are correct d. The money supply increases by $5.26 billion e. The money supply decreases by $11.88 billion

Solution

Since the FOMC is selling the treasury securities there will be decrease in money supply

Decrease in bank deposits and money supply = (1/.0475) * $250 million = $5263 Million = 5.26 Billion

Answer = The money supply decreases by $5.26 billion (Option B)