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Assume that the reserve requirement for demand deposits is 20 percent, that banks hold no excess reserves, and that the public holds no currency. If the central bank sells $10,000 worth of government securities to commercial banks, the total money supply will

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Answer:

The right solution is "decrease by $50,000". A further explanation is description if provided below.

Explanation:

The given values:

Sell amount,

= 10,000

Reserve ratio,

= 20%

i.e.,

= 0.2

Now,

The decrease in money supply will be:

=  [tex]\frac{Sell \ amount}{Reserve \ ratio}[/tex]

On substituting the values, we get

=  [tex]\frac{10000}{0.2}[/tex]

=  [tex]50,000[/tex] ($)

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