Question

If the money multiplier is 3 and the Fed wants to increase the money supply by $900,000, it could 18. A. Buy $300,000 worth of bonds. B. Buy $225,000 worth of bonds. C. Sell $300,000 worth of bonds. D. Sell $225,000 worth of bonds.

Answer 1

Answer:

The right solution is Option A "buys $300000 worth rupees bonds".

Explanation:

Given:

Money multiplier,

= 3

Change in money supply,

= $900000

As we know,

⇒ $Money \ multiplier=\frac{Change \ in \ total \ money \ supply}{Change \ in \ total \ monetary \ base}$

Or,

⇒ $Change \ in \ total \ monetary \ base=\frac{Change \ in \ total \ money \ supply}{Money \ multiplier}$

On putting the values, we get

⇒                                                    $=\frac{900000}{3}$

⇒                                                    $=300000$ ($)