Question

1. When the Fed sells bonds in open-market operations, it _____________ the money supply.

Answer 1

Answer:

1) decreases

2) decreases

3) increase

4)  decrease

5) decreases

Explanation:

1. When the Fed sells bonds in open-market operations, it decreases the money supply.

If the Fed sells bonds, it decreases the money supply by removing cash from the economy in exchange for bonds.

2. If the Fed raises the reserve requirement, the money supply decreases.

By increasing the reserve requirement, the Federal Reserve is essentially taking money out of the money supply and increasing the cost of credit.

3. When the Fed decreases the interest rate it pays on reserves, the money supply will increase.

When the Fed decreases the interest rate paid on reserves, it: decreases the reserve-deposit ratio (rr) thereby increasing the money supply.

4) When the FOMC increases its target for the federal funds rate, the money supply will decrease.

The Federal Open Market Committee (FOMC) is the monetary policy-making body of the Federal Reserve System. While the FOMC can't mandate a particular federal funds rate, they can adjust the money supply so that interest rates will move toward the target rate. Therefore, by increasing the amount of money in the system it can cause interest rates to fall; by decreasing the money supply it can make interest rates rise.

5) When Citibank repays a loan it had previously taken from the Fed, it decreases the money supply.

The money supply reduces gradually by the amount of the principal when bank loans are repaid. So if Citibank repays a loan it had previously taken from the Fed, it will decrease the money supply.