Suppose the money multiplier in the United States is 3. Suppose further that if the Fed decreased the discount rate by 1 percentage point, banks change their reserves by 300. To increase the money supply by 2,700 the Fed should:

Question

Quizplus · Accepted Answer

Given the money multiplier is 3, a change in reserves by 300 leads to a change in the money supply by 900 (300 * 3). To increase the money supply by 2,700, the Fed needs to increase reserves by 900 (2,700 / 3). Since a 1 percentage point change in the discount rate changes reserves by 300, a 3 percentage point change (900 / 300) is needed to achieve the desired increase in the money supply.

Suppose the Money Multiplier in the United States Is 3