Which of the following actions would have the combined effect of raising the money supply and raising the money multiplier?
A)The Fed sells bonds and raises the reserve requirement ratio.
B)The Fed sells bonds and lowers the reserve requirement ratio.
C)The Fed buys bonds and raises the reserve requirement ratio.
D)The Fed buys bonds and lowers the reserve requirement ratio.

Question

Quizplus · Accepted Answer

When the Fed buys bonds, it injects reserves into the banking system, which increases the money supply. When the reserve requirement ratio is lowered, the banks are required to hold fewer reserves relative to their deposits, allowing them to lend out more of their deposits. This increase in lending creates a higher money multiplier, meaning that a given increase in reserves leads to a larger increase in the money supply. Therefore, the combination of buying bonds and lowering the reserve requirement ratio would have the combined effect of raising the money supply and raising the money multiplier.

Which of the Following Actions Would Have the Combined Effect