When the central bank sells $5,000,000 worth of government bonds to the public,the money supply
A) decreases by more than $5,000,000.
B) decreases by $5,000,000.
C) decreases by less than $5,000,000.
D) does not change.
E) increases by $5,000,000.

Question

Quizplus · Accepted Answer

When the central bank sells government bonds, it takes money out of circulation, reducing the reserves of banks. This leads to a multiplied decrease in the money supply due to the money multiplier effect, resulting in a decrease greater than the initial $5,000,000.

When the Central Bank Sells $5,000,000 Worth of Government Bonds