Question

which explains how treasury bonds can have an effect on the size of the money supply? responses the federal reserve bank can buy and sell treasury bonds to raise or lower bank deposits. the federal reserve bank can buy and sell treasury bonds to raise or lower bank deposits. the use of treasury bonds to pay for government expenses leads to increased inflation.

Answer 1

Buying treasury bonds by the central bank increases the money supply by adding money to the economy, while selling treasury bonds decreases the money supply by removing money from circulation.

Step-by-step explanation:

Impact of Treasury Bonds on Money Supply

When considering the question of whether selling or buying bonds affects the money supply, it is essential to look at the actions of the central bank. If the central bank purchases treasury bonds, it pays out money which increases the amount of money in circulation among banks and the general economy, thus increasing the money supply. Conversely, when a central bank sells treasury bonds, it receives money from banks, which then reduces the amount of money in circulation, thereby decreasing the money supply.

These actions are crucial for the central bank to regulate the economy's liquidity and control inflation. Such transactions are part of monetary policy tools used to manage economic activity and control the cost of borrowing, which influences interest rates. This is a simple way to remember how central bank operations involving bonds can impact the money supply and hence macroeconomic stability and growth.