Question

Explain how each of the following changes the money supply. a. the Fed buys bonds b. the Fed auctions credit c. the Fed raises the discount rate d. the Fed raises the reserve requirement

Answer 1

Answer:

Following are the changes

Explanation:

When fed buy bonds it increases the overall money supply in the market because they buy bonds in exchange for money. If firm auction credit it also leads to an increase in the money supply as long as more funds are available. When fed raises the discount rate it decreases the money supply because interest on borrowing will increase. Increase in the reserve requirement decreases the money supply because no banks have to hold more money in the reserves.