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15 August, 08:20

If the central bank sells $500 in bonds to a bank that has issued $10,000 in loans and is exactly meeting the reserve requirement of 10%, what will happen to the amount of loans and to the money supply in general?

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  1. 15 August, 09:28
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    For finding out the money supply, first we have to determine the reserve amount which is shown below:

    Reserve amount = $10,000 * 10% = $1,000

    Out of which $500 was sold

    The remaining $500 reflects the decrease in the loan value which affects the money supply also.

    The money supply would be computed below

    = $500 * 1 : 10%

    = $5,000

    This money supply would decreased by $5,000
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