Question

how will the fed's policy action change the money supply? use only the actions corresponding to your choice in the previous part. you are currently in a sorting module. turn off browse mode or quick nav, tab to items, space or enter to pick up, tab to move, space or enter to drop.the money supply increases the fed buys bonds the fed buys foreign currency the fed decreases the reserve ratio the fed increases the rate at which it lends to member banks the money supply decreases the fed sells bonds the fed sells foreign currency the fed increases the reserve ratio the fed decreases the rate at which it lends to member banks

Answer 1

The Federal Reserve alters the money supply by selling bonds (contractionary policy) or buying bonds (expansionary policy), adjusting reserve requirements, and changing the discount rate. Selling bonds reduces the money supply, while buying bonds increases it.

Step-by-step explanation:

When the Federal Reserve (Fed) wishes to implement a contractionary monetary policy, it will sell bonds. This action results in money flowing from individual banks into the Fed, effectively reducing the money supply in the economy. Conversely, an expansionary monetary policy is carried out through the purchase of bonds by the Fed, which causes money to flow into the banking system, thus increasing the money supply. Adjusting the reserve ratio and the discount rate are additional tools the Fed uses to influence the money supply. Increasing the reserve ratio decreases the money supply by requiring banks to hold more funds in reserve, whereas decreasing it has the opposite effect. Raising the discount rate makes borrowing from the Fed more expensive for banks, reducing the money supply, whereas lowering the rate increases money supply by making loans cheaper for member banks.

A contractionary policy is intended to decrease inflation and cool an overheated economy by raising interest rates and slowing down investment and spending, while an expansionary policy is aimed at stimulating economic activity by lowering interest rates and encouraging investment and spending.