Assume that the M1 multiplier is 3 and the Federal Reserve sells $100 million worth of government securities. Bank reserves will
A) rise by $100 million.
B) fall by $100 million.
C) fall by $300 million.
D) fall by $33.33 million.

Question

Quizplus · Accepted Answer

When the Federal Reserve sells government securities, it decreases banks' reserves. Since the M1 multiplier is 3, this means that for every $1 decrease in bank reserves, the money supply contracts by $3. Therefore, a $100 million decrease in reserves will lead to a $300 million contraction in the money supply.

Assume That the M1 Multiplier Is 3 and the Federal