The banking system currently has $200 billion of reserves, none of which are excess. People hold only deposits and no currency, and the reserve requirement is 20 percent. If the Fed lowers the reserve requirement to 10 percent and at the same time buys $20 billion worth of bonds, then by how much does the money supply change

Money supply will decrease by $1.8 trillion

Explanation:

The current money multiplier = 1 / reserve ratio

= 1 / 20%

= 5

The new money multiplier would be

= 1 / 10%

= 10

If the total bank's reserves are $200 billion, then the total deposits are $1 trillion.

The new reserve ratio will decrease the money supply by $2 trillion ($200 billion in extra reserves × 10)

Also, the money injected by the federal reserves with the purchase of $20 billion worth of bonds , will increase the money supply by $20 billion × 10 = $200 billion

The net effect would be

= -$2 trillion + $200 billion

= -$1.8 trillion

answer; capital structure decision;