Question

The money supply increases when the fed

a. sells bonds. the increase will be larger, the larger is the reserve ratio.
b. buys bonds. the increase will be larger, the larger is the reserve ratio.
c. sells bonds. the increase will be larger, the smaller is the reserve ratio.
d. buys bonds. the increase will be larger, the smaller is the reserve ratio.

Answer 1

The correct answer is D

When the government "buys" bonds, it "blows" money into the money supply, or increases it. When they "sell" bonds, it "sucks" money out of the money supply and decreases it.

The smaller the reserve ratio, the less money that the banks need to keep. So if the reserve ratio is smaller, it will create less money stuck in banks and a bigger increase.