Question

Which describes the most likely effect of the sale of a new batch of Treasury bonds? a decrease in the money supply an increase in the money supply a reduction in the inflation rate an increase in unemployment

Answer 1

A decrease in the money supply

Answer 2

a decrease in the money supply an increase in the money supply

Step-by-step explanation:

The actions of the Federal Reserve of buying and selling are known as open market operations. The Fed uses open market operations as one of the monetary tools to regulate the supply of money supply in the economy.

When the Fed sells Treasury bonds through the banks, it causes a reduction of money supply in the country. The banks lend out a percentage of their deposit to customers and increase the supply of money. Should the fed require banks to buy the treasury bills, the banks will use their deposits and reserves to pay for the treasury bills. The actions of selling treasury bills, therefore, decrease the amount of money available out for banks to lend out, thereby decreasing the money supply.