Suppose the money supply (as measured by checkable deposits) is currently $850 billion. The required reserve ratio is 20%. Banks hold $170 billion in reserves, so there are no excess reserves. The Federal Reserve ("the Fed") wants to decrease the money supply by $42.5 billion, to $807.5 billion. It could do this through open-market operations or by changing the required reserve ratio. Assume for this question that you can use the simple money multiplier. 1. If the Fed wants to decrease the money supply using open-market operations, it should (buy / sell)$billion worth of U. S. government bonds.
2. If the Fed wants to decrease the money supply by adjusting the required reserve ratio, it shouldthe required reserve ratio.