Suppose the money multiplier in the United States is 3.  Suppose further that if the Fed increases the discount rate by 1 percentage point, banks initially change their reserves by 400. To reduce the money supply by 4,200 the Fed should:

A. raise the discount rate by 10.5 percentage points.
B. raise the discount rate by 3.5 percentage points.
C. reduce the discount rate by 3.5 percentage points.
D. reduce the discount rate by 10.5 percentage points.


Answer: B

Economics

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