Assume the required reserve ratio is 10 percent and the FOMC orders an open market sale of $50 million in government securities to banks. Using the oversimplified money multiplier, the money supply could potentially: a. decrease by $500 million.
b. increase by $100 million.
c. decrease by $100 million.
d. increase by $500 million.

decrease by $500 million.

Explanation:

Money supply is the total amount of money that are in circulation at a particular period of time.

From the question,

Required reserve ratio = 10%

Open market sale = $50 million

Money multiplier = 1/10%

= 1/0.1 = 10

Money supply = $50 million × 10

= $ 500 million

Since the FOMC orders an open market sale, this will lead to the decrease by $500 million.

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