Question

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

Answer 1

When the Fed lowers the discount rate and conducts an open market sale, the money supply will decrease. Therefore, the correct option is C.

Step-by-step explanation:

When the Federal Reserve lowers the discount rate at the same time it conducts an open market sale, the money supply will fall. This is because when the discount rate is lowered, commercial banks are encouraged to borrow more reserves from the Fed, which increases their lending capacity and leads to an increase in the money supply.

However, when the Fed also conducts an open market sale, it decreases the amount of reserves available in the market, which offsets the increase in the money supply from the lower discount rate. As a result, the overall effect is a decrease in the money supply.