Suppose that the money multiplier is 4. If the monetary base decreases by $2 million, the quantity of money will
A) decrease by $8 million.
B) increase by $500,000.
C) decrease by $500,000.
D) increase by $8 million.

Question

Quizplus · Accepted Answer

The money multiplier indicates how much the money supply will change in response to a change in the monetary base. If the money multiplier is 4, a decrease in the monetary base by $2 million will lead to a decrease in the money supply by 4 times that amount, which is $8 million.

Suppose That the Money Multiplier Is 4