If the Fed decides to increase the money supply by $200 million,it can accomplish this by buying fewer than $200 million worth of government bonds in the open market.

Question

Quizplus · Accepted Answer

This statement is true because when the Fed buys government bonds on the open market, it injects money into the economy. The amount of money injected is often larger than the amount of bonds purchased, due to the multiplier effect. For example, if the Fed buys $100 million worth of bonds and the multiplier is 2, the total increase in the money supply will be $200 million. Therefore, the Fed can increase the money supply by buying fewer than $200 million worth of government bonds, depending on the multiplier effect.

If the Fed Decides to Increase the Money Supply by $200