If the money multiplier is 3 and the Fed wants to increase the money supply by $900,000, it could
A)buy $300,000 worth of bonds.
B)buy $225,000 worth of bonds.
C)sell $300,000 worth of bonds.
D)sell $225,000 worth of bonds.

Question

Quizplus · Accepted Answer

The money multiplier formula is 1/reserve ratio. If the multiplier is 3, it means that for every dollar the Fed injects into the banking system, the money supply increases by $3. Therefore, to increase the money supply by $900,000, the Fed needs to buy $300,000 worth of bonds. This initial injection gets multiplied by the banking system.

If the Money Multiplier Is 3 and the Fed Wants