Suppose you are given a money supply model where r 01 e 02

Suppose you are given a money supply model where r = 0.1, e = 0.2, and c = 0.4. What is the money multiplier? What change in the money supply will result from an open market sale of $400,000?

Solution

Suppose you are given a money supply model where r = 0.1, e = 0.2, and c = 0.4. What is the money multiplier? What change in the money supply will result from an open market sale of $400,000?

The money multiplier is defined as:

m = (1+c)/(rr+e+c)

m = (1+ 0.4) / (0.1 + 0.2 + 0.4)

m = 1.4 / 0.7; m = 2.

On account of open market sale of $400,000:

400,000 x 2 = $800,000 change in money supply.

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