Suppose the money multiplier in the United States is 2.5. If the Fed wants to reduce the money supply by 1,500 it should:

Question

Quizplus · Accepted Answer

The money multiplier formula is 1/required reserve ratio. To reduce the money supply, the Fed can sell government securities. Selling $600 worth of securities with a multiplier of 2.5 would reduce the money supply by $1,500 (600 * 2.5 = 1,500). Raising reserve requirements or the discount rate are also ways to reduce the money supply, but the question specifically asks for an action that directly leads to a $1,500 reduction, which is achieved by selling securities worth $600.

Suppose the Money Multiplier in the United States Is 2