Assume a money multiplier of 3. If the Treasury finances a $30 million expenditure by selling securities to the Fed, the money supply could ultimately
A) rise by $3 million.
B) rise by $10 million.
C) rise by $30 million.
D) rise by $90 million.

Question

Quizplus · Accepted Answer

The money multiplier formula is 1/reserve ratio. With a multiplier of 3, every dollar of new reserves can increase the money supply by $3. If the Fed buys $30 million in securities, this initial increase can ultimately lead to a $90 million increase in the money supply (3 times $30 million).

Assume a Money Multiplier of 3