Allison lives and banks in Texas. The reserve requirement is 20%. If Allison buys government bonds from the Federal Reserve for $1,000,000, will the money supply likely rise, fall, or not change? (Hint: Is the Fed buying or selling or not taking part in this transaction?) It will likely ________________. If it will rise or fall, calculate the maximum change in the money supply from this transaction, showing your work. Solution.

1. Allison lives and banks in Texas. The reserve requirement is 20%. If Allison buys government
bonds from the Federal Reserve for $1,000,000, will the money supply likely rise, fall, or not
change? (Hint: Is the Fed buying or selling or not taking part in this transaction?) It will likely
________________. If it will rise or fall, calculate the maximum change in the money supply
from this transaction, showing your work.
Solution