The equation that describes the money supply (M) is M  (1rr)  R, where rr is the reserve ratio, and R is total reserves in the banking system.

a) If the reserve ratio is increased, all else the same, what happens to the money supply?

b) When the Fed buys securities from banks, it increases reserves in the banking system. This in turn reduces the money supply. True or false? Explain.

c) How can the Fed offset a decrease in the reserve ratio to keep the money supply unchanged?