Question

The money supply decreases if the Fed Select one: a. sells Treasury bonds. The smaller the reserve requirement, the larger the decrease will be. b. buys Treasury bonds. The larger the reserve requirement, the larger the decrease will be. c. buys Treasury bonds. The smaller the reserve requirement, the larger the decrease will be. d. sells Treasury bonds. The larger the reserve requirement, the larger the decrease will be.

Answer 1

Answer:

d. sells Treasury bonds. The larger the reserve requirement, the larger the decrease will be.

Explanation:

If the Fed targets to decrease the money supply, it uses contractionary policies. These are policies that make it hard for banks to loan out money to firms and households. By selling treasury bonds to banks, the Fed reduces the money available to the banks to loan out. Banks pay for the treasury bonds using customer deposits, thereby draining the money available to be issued out as loans.

Increasing the size of the reserve requirement reduces the percentage of deposits available to be loaned out. Reserves are a percentage of customers deposits that the Fed requires banks to maintain in their custody at all times. Reserves cannot be issued out as loans. The larger the reserve requirements, the lesser the proportion of funds are available for credit purposes.