19) If the actual (real world) money multiplier equals the simple money (deposit

Question

19) If the actual (real world) money multiplier equals the simple money (deposit) money multiplier and if the Fed wishes to reduce the money supply by $1 million when required reserves are 20 percent, then the Fed should

A) sell $200,000 of government securities

B) buy $200,000 of government securities

C) sell $1,000,000 of government securities

D) sell $500,000 of government securities

E) buy $500,000 of government securities

-money multiplier=1/reserved ratio

-change in money supply= change in reserve*money multiplier ;therefore in this question isn't that D? Another question is changed in reserve does not include excess reserve? Could possibly explain the difference between M1 and M2?

Explanation / Answer

The correct answer is option (A). The Fed should sell $200,000 of government securities.

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