Assume that the M1 multiplier is 4. If the Federal Reserve purchases $200 worth of government securities, the money supply will
A) rise by $200.
B) rise by $800.
C) fall by $200.
D) fall by $800.

Question

Quizplus · Accepted Answer

The M1 multiplier is 4, which means that any injection of money by the Federal Reserve will lead to an expansion of the money supply by a factor of 4. Therefore, if the Fed purchases $200 worth of securities, the money supply will increase by $800 (4 times the initial injection).

Assume That the M1 Multiplier Is 4