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: C. The Fed buying bonds and lowering the discount rate will increase the money supply.

Explanation: When the Fed purchases bonds, they are able to then sell the bonds or loan them out to stockholders for them to invest. When the stockholders invest in these bonds, they are increasing the monetary supply. The discount rate is the interest rate that is charged to banks from, the Federal Reserve. If banks borrow more money for their lenders, they are creating a larger supply.