Question

Which of the following lists two things that both increase the money supplyA. the Fed buys bonds and raises the discount rateB. the Fed sells bonds and raises the discount rateC. the Fed buys bonds and lowers the discount rateD. the Fed sells bonds and lowers the discount rate

Answer 1

Answer: The correct answer is choice C.

Explanation: If the fed is looking to increase the money supply there are a variety of ways for them to do this. Two of the ways are in choice c; the fed buys bonds and lowers the discount rate.

Buy purchasing bonds the federal government is putting money into the economy, increasing money supply. Lowering the discount rate also increases the money supply. When banks pay a lower interest rate they can in turn charge a lower interest rate to its customers, resulting in more customers borrowing money.