If the multiplier is 6 the income multiplier with respect to

If “the” multiplier is 6, the income multiplier with respect to the money supply is 4, and the money multiplier is 5, then which of the following policies increase income by $50 billion dollars?

a. Increase money supply by $2.5 billion.

b. Increase in government spending by $10 billion.

c. Fed purchase of $12.5 billion in bonds.

d. Increase in government spending by $3 billion and the money supply by $8 billion.

e. Fed sale of $2 billion in bonds and increase in government spending by $15 billion.

f. Fed purchase of $1 billion in bonds and increase government spending by $5 billion.

Solution

c. Fed purchase of $12.5 billion in bonds.

With Fed purchase of $12.5 billion in bonds, money supply will increase by $12.5 billion. The income multiplier with respect to the money supply is 4 and hence income will increase by 12.5*4 = $50 billion.