Answer the Question on the Assumption That the Legal Reserve

Multiple Choice

Answer the question on the assumption that the legal reserve ratio is 20 percent.Suppose that the Fed sells $500 of government securities to commercial banks (paid for out of commercial bank reserves) and buys $500 of securities from individuals, who deposit the cash in checking accounts.As a result of the given transactions, the supply of money in the economy will

A) remain unchanged.
B) rise by $500.
C) fall by $100.
D) fall by $500.