If the money multiplier is 2 and the Fed wants to increase the money supply by $900,000, it could
A)buy $300,000 worth of bonds.
B)buy $450,000 worth of bonds.
C)sell $300,000 worth of bonds.
D)sell $450,000 worth of bonds.

Question

Quizplus · Accepted Answer

The money multiplier formula is 1/rr, where rr is the reserve ratio. If the money multiplier is 2, then the reserve ratio must be 1/2 or 50%. The Fed can increase the money supply by purchasing government bonds. The purchase of $450,000 worth of bonds (50% of $900,000) would inject $900,000 into the economy, as banks can use their excess reserves to make loans that can be multiplied by the money multiplier. Therefore, Option B is the best choice.

If the Money Multiplier Is 2 and the Fed Wants