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Question
The Federal Reserve has decided it wants to increase interest rates by decreasing the money supply through deposits held at financial intermediaries. All else equal, if the reserve requirement is 10% for all deposits, and the Fed wants to decrease deposits by $100 million, which of the following actions should be taken? Assume no excess reserves exist in the banking system.
a. Buy government securities from dealers totaling $1 billion.
b. Sell government securities to dealers totaling $111 million.
c. Buy government securities from dealers totaling $11.1 million.
d. Sell government securities to dealers totaling $11.1 million.
e. None of the above.
Answer
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