Suppose that the money multiplier is 4. If the monetary base decreases by $2 million, the quantity of money will
A) increase by $8 million.
B) increase by $500,000.
C) decrease by $8 million.
D) decrease by $500,000.

Question

Quizplus · Accepted Answer

The money multiplier formula is the ratio of the change in the quantity of money to the change in the monetary base. If the monetary base decreases by $2 million and the money multiplier is 4, then the quantity of money decreases by 4 times $2 million, which is $8 million.

Suppose That the Money Multiplier Is 4