Question

If the Fed sells $1$ million of bonds and banks reduce their borrowings from the Fed by million, predict what will happen to the money supply.

Short answer

Selling of bonds by fed and banks lowering their borrowings with fed, both take the money out of the economy so $M1$will reduce by $2$million.

Step-by-step solution

Concept Introduction

The cash supply is the whole measure of cash, coins, and balances in financial balances available for use. The cash supply is for the most part characterized to be a bunch of safe resources that families and organizations can use to make installments or to hold as transient speculations.

Explanation

The Fed can handle the cash supply by altering save prerequisites, which regularly alludes to how much finances banks should hold against stores in ledgers. By bringing down the hold prerequisites, banks can credit more cash, which extends the general stockpile of cash in the economy.

Final Answer

Selling of bonds by fed and banks lowering their borrowings with fed, both take the money out of the economy so$M1$ will reduce by $2$million