If the Fed sells $200 million in government bonds, the total money supply will:

a. decrease by more than $200 million.

b. decrease by less than $200 million but more than $0 million.

c. decrease by exactly $200 million.

d. not change.

• The correct option is a. decrease by more than $200 million.

When the Fed sells the government bonds of $200 million, the public buys these bonds in exchange for money. This causes a decrease in the money supply by $200 million. Also, the money multiplier affects the money supply in the economy. As the value of the money multiplier is greater than one, so the decrease in the money supply will be more than the decrease in the money supply by the Fed. Therefore, the money supply in the economy will decrease by more than $200 million.