Question

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 publica. 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

Answer 1

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

Step-by-step explanation:

Banks "create" money when they use their clients' money to make loans to other clients. If the banks' clients started to withdraw significant amounts of money, that would reduce the banks' capability of creating money which in turn would reduce the money multiplier. If the FED had bought bonds from private investors then they would have increased the money supply and probably also increased the money multiplier.