Here is a multiple contraction of the money supply resulting from open market sales of securities by the Bank of Zambia. Assume the following: (i) the reserve requirement of commercial banks is 10%, and (ii) all commercial banks hold no excess reserves.
a) Suppose the Bank of Zambia sells two K14, 000 bonds, one each to Tembo and Banda. Tembo pays for her bond with money she withdraws from her account at Nations Bank. Banda pays for his bond with money he stored in his closet.