One alternative way (from the formula on p. 419) to calculate the total change i

Question

One alternative way (from the formula on p. 419) to calculate the total change in money supply when the Fed injects money into the economy or takes away money from the economy is the amount of money injected or taken away by the Fed times the money multiplier. In a simplified banking system in which all banks are subject to a 20% required reserve ratio, a sale of $10,000 government securities by the Fed would cause the money supply to




A. increase by $100,000.

B. none of the above.

C. decrease by $100,000.

D. increase by $50,000.

E. decrease by $50,000.

Explanation / Answer

A. increase by $100,000.

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