When the central bank sells $1,000,000 worth of government bonds to the public,the money supply
A) decreases by more than $1,000,000.
B) decreases by $1,000,000.
C) decreases by less than $1,000,000.
D) does not change.
E) increases by $1,000,000.

Question

Quizplus · Accepted Answer

When the central bank sells government bonds, it reduces the reserves in the banking system, leading to a decrease in the money supply by more than the amount of the bonds due to the money multiplier effect.

When the Central Bank Sells $1,000,000 Worth of Government Bonds