Question

In December 1999 people feared that there might be computer problems at banks as the century changed. Consequently, people wanted to hold relatively more in currency and relatively less in deposits. In anticipation banks raised their reserve ratios to have enough cash on hand to meet depositors' demands. These actions by the public (explain the answer)
a. would increase the multiplier. If the Fed wanted to offset the effect of this on the size of the money supply, it could have sold bonds.

b. would increase the multiplier. If the Fed wanted to offset the effect of this on the size of the money supply, it could have bought bonds.

c. would reduce the multiplier. If the Fed wanted to offset the effect of this on the size of the money supply, it could have sold bonds.

d. would reduce the multiplier. If the Fed wanted to offset the effect of this on the size of the money supply, it could have bought bonds

Answer 1

would reduce the multiplier. If the Fed wanted to offset the effect of this on the size of the money supply, it could have bought bonds

Answer: Option D.

Explanation:

The situation that has been explained in the question would result in the increase in the money in hand with the people because of which the investment decreased and the economy slowed down.

This will have an adverse effect on the multiplier which is working on the economy because of the reduction in the investment in the economy and the fed should work to solve this problem by buying some of the bonds to increase the money in the deposits.