Question

In Problem 15-24, what would be the amount of the potential money multiplier that applies to a 100,000$ decrease in reserves caused by a Fed open market sale of that amount? How much would the money supply potentially decrease as a result of this sale?

Short answer

The amount of the potential money multiplier will be $10$.

The money supply potentially decreases as a result of this sale will be$\$1$million.

Step-by-step solution

introduction

In each progressive round, cash supply increments by a more modest sum than it did in the past round. All in all, the cash supply grows at a diminishing rate. Consequently, the bend portraying development in cash supply is up slanting and sunken in shape.

explanation 

From the figure that assuming the Federal Reserve infuses $\$100000$into the financial framework through an open market buy, the cash supply in the economy extends by $\$1$million.

Now, change in excess reserves be denoted by$\mathrm{△}\mathrm{ER}$and the resultant change in money supply be$\mathrm{△}\mathrm{Ms}$then,

role="math" localid="1651583423676" $$\begin{gathered} MoneyMultiplier=\frac{\mathrm{\Delta }Ms}{\mathrm{\Delta }ER} \\ =\frac{1000000}{100000}=10 \end{gathered}$$

explanation

The money supply potentially decreases as a result of this sale

$$\begin{gathered} \begin{array}{r}\mathrm{Now},\mathrm{\Delta }Ms=MM\times \mathrm{\Delta }ER\\ \mathrm{\Delta }Ms=10\times -100,000\end{array} \\ =-1000000 \end{gathered}$$

The money supply potentially decreases as a result of this sale will be$\$1$million.