If the Fed buys a T-bill from an individual rather than from a bank, the effect on the money supply is
A)smaller because there is no multiplier process.
B)larger because of the multiplier process.
C)the same.
D)impossible to predict without knowing the value of the multiplier.

Question

Quizplus · Accepted Answer

Buying a T-bill from an individual or a bank has the same effect on the money supply. The transaction increases the reserves of the seller by the same amount that the Fed pays for the T-bill, but it does not affect the overall money supply. This is because the seller has a deposit in their account at the bank where they sold the T-bill, and the bank can lend out that deposit to borrowers, which creates new money in the economy through the multiplier process. However, this loan creation process is not affected by whether the Fed bought the T-bill from an individual or a bank.

If the Fed Buys a T-Bill from an Individual Rather