When the Fed purchases $1000 worth of government bonds from the public,the U.S.money supply eventually increases by
A)more than $1000.
B)exactly $1000.
C)less than $1000.
D)None of the above are correct.

Question

Quizplus · Accepted Answer

When the Fed purchases $1000 worth of government bonds from the public, the money supply increases by more than $1000. This is because the money multiplier effect takes place, where banks can loan out a portion of the new money they receive as deposits. This creates new money in the system, increasing the overall money supply. So, the increase in money supply will be the initial $1000 plus the new money created by the banks.

When the Fed Purchases $1000 Worth of Government Bonds from the Public,the