Suppose that the reserve requirement ratio is 5% and that the Fed uses open market operations by SELLING $100 million worth of Treasury securities. Assume that banks use all funds except required reserves to make loans and that the public does not store any cash.
A. Does this Fed action increase or decrease the money supply (all else equal)? EXPLAIN.
B. Given the information above, what is the best estimate of how much the money supply changes as a result of the Fed's action?