If the Fed sells $5 million in government bonds, how much will the money supply change?
A)It will increase by $5 million.
B)It will increase by more than $5 million.
C)It will decrease by $5 million.
D)It will decrease by more than $5 million.

Question

Quizplus · Accepted Answer

When the Fed sells government bonds, it takes money out of circulation, decreasing the money supply. The effect is magnified by the money multiplier, leading to a decrease greater than the initial $5 million.

If the Fed Sells $5 Million in Government Bonds, How