Question

if the fed raises the discount rate at the same time it conducts an open market sale, it follows that the money supply will a. fall. b. rise. c. remain unchanged. d. there is not enough information to answer the question.

Answer 1

If the Fed raises the discount rate and conducts an open market sale, the money supply will fall as both actions work to tighten monetary policy and reduce the amount of money circulating in the economy. The correct answer is option: a. fall.

Step-by-step explanation:

If the Federal Reserve (the Fed) raises the discount rate at the same time it conducts an open market sale, the money supply will fall. The discount rate is the interest rate charged to commercial banks for loans they take from the Federal Reserve. By raising this rate, the Fed discourages banks from borrowing, leading banks to rely more on their reserves or call in loans, which reduces the money supply.

Meanwhile, an open market sale entails the Fed selling government securities to financial institutions, which decreases those institutions' reserves, thus contracting the money supply further. Both of these actions tighten monetary policy, with the expected outcome being a reduction in the money supply.