Suppose the money multiplier in the United States is 2.5. If the Fed wants to reduce the money supply by 1,000 it should:

Question

Quizplus · Accepted Answer

To reduce the money supply by $1,000 with a money multiplier of 2.5, the Fed should sell government securities worth $400. This is because the money multiplier effect means that for every dollar the Fed removes from the banking system by selling securities, the money supply decreases by the multiplier times that amount. Therefore, $400 times the multiplier of 2.5 equals a $1,000 reduction in the money supply.

Suppose the Money Multiplier in the United States Is 2