In December 1999 people feared that there might be computer problems at banks as the century changed.Consequently,people wanted to hold relatively more in currency and relatively less in deposits.In anticipation banks raised their reserve ratios to have enough cash on hand to meet depositors' demands.These actions by the public
A)would increase the multiplier.If the Fed wanted to offset the effect of this on the size of the money supply,it could have sold bonds.
B)would increase the multiplier.If the Fed wanted to offset the effect of this on the size of the money supply,it could have bought bonds.
C)would reduce the multiplier.If the Fed wanted to offset the effect of this on the size of the money supply,it could have sold bonds.
D)would reduce the multiplier.If the Fed wanted to offset the effect of this on the size of the money supply,it could have bought bonds.

Question

Quizplus · Accepted Answer

The actions by the public would reduce the multiplier because people are holding more cash and less deposits which means less money is available for lending and spending, leading to a decrease in the money supply. To offset this effect, the Fed could buy bonds, which would provide banks with more reserves to lend out, increasing the money supply. Selling bonds would have the opposite effect, further reducing the money supply. Therefore, the correct choice is D.

In December 1999 People Feared That There Might Be Computer