Question

How does a bond sale by the Fed affect the money supply?

It does not affect the money supply.

The sale decreases the money supply.

The sale increases the money supply.

The sale increases the money supply but not in the proportion that the multiplier effect would suggest.

Answer 1

If the Fed buys bonds in the open market, it increases the money supply in the economy by swapping out bonds in exchange for cash to the general public. Conversely, if the Fed sells bonds, it decreases the money supply by removing cash from the economy in exchange for bonds.