Question

1. Describe the effect each action below will have on the money supply. Explain your reasoning.

A. The Feds raises the discount rate from 5% to 10%.






B. The required reserve ratio is lowered from 20% to 10%.






C. The Fed sells $5 billion worth of T-bonds on the open market.






D. The Fed buys $5 billion worth of T-bonds on the open market.

Answer 1

Raising the discount rate decreases the money supply by making bank borrowing from the Federal Reserve more expensive. Decreasing the required reserve ratio increases the money supply by allowing banks to lend out more of their deposits. Selling T-bonds reduces the money supply while buying T-bonds increases it.

Step-by-step explanation:

Effects of FED's Actions on Money Supply

Raising the discount rate from 5% to 10% would reduce the money supply. This is because higher discount rates make borrowing more expensive for banks, leading to reduced borrowing from the Federal Reserve, fewer loans to customers, and ultimately a contraction of the money supply.

Lowering the required reserve ratio from 20% to 10% would increase the money supply. With lower reserve requirements, banks can lend more of their deposits, which boosts the amount of money circulating in the economy.

Selling T-bonds on the open market would decrease the money supply. When the Fed sells bonds, it takes money out of circulation as investors pay for these bonds, reducing the amount of money in the economic system.

Buying T-bonds on the open market would increase the money supply. The Fed pays for these bonds with money that goes into the economy, thus increasing the amount of money in circulation.

Answer 2

The Fed sells $5 billion worth of T-bonds on the open market.