When the Fed sells $100 of bonds, the monetary base falls by an amount _____ $100 and the money supply falls by an amount _____ $100.

Question

Quizplus · Accepted Answer

When the Fed sells $100 of bonds, the monetary base decreases by exactly $100 as it removes this amount from the banking system. However, due to the money multiplier effect in the banking system, where banks lend out a portion of their deposits, the money supply decreases by an amount greater than $100.

When the Fed Sells $100 of Bonds, the Monetary Base