We would expect which of the following to occur when the central bank conducts an open market sale of bonds?
A)a reduction in the monetary base (H)
B)a reduction in the money multiplier
C)an increase in H
D)an increase in the money multiplier
E) both C and D

Question

Quizplus · Accepted Answer

When the central bank conducts an open market sale of bonds, it sells bonds to the public, decreasing the reserves of the commercial banks, causing a decrease in the monetary base H. This reduction in the monetary base also leads to a reduction in the money supply, which is determined by the money multiplier, leading to a decrease in the money multiplier. Therefore, options B and D can be eliminated. Option E is incorrect as it suggests that both H and the money multiplier increase, which is not the case. Therefore, the correct answer is A.

We Would Expect Which of the Following to Occur When