If the money multiplier is 3.5,a $10 billion increase in the monetary base
A) increases the quantity of money by $35 billion.
B) increases the quantity of money by $10 billion.
C) increases the quantity of money by $3.5 billion.
D) increases the quantity of money but not by an amount given above.

Question

Quizplus · Accepted Answer

The money multiplier indicates how much the money supply increases given a certain increase in the monetary base. In this case, a money multiplier of 3.5 means that the money supply will increase by 3.5 times the initial increase in the monetary base. Therefore, a $10 billion increase in the monetary base will result in a $35 billion increase in the money supply (10 billion x 3.5).

If the Money Multiplier Is 3