ECONOMICS
FEDERAL RESERVE
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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increase
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decrease
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Either A or B
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None of the above
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Detailed explanation-1: -The Federal Reserve can increase the money supply by purchasing U.S. Treasury securities. a. The purchase of securities increases the amount of reserves in the system, thereby increasing loan activity. 2.
Detailed explanation-2: -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.
Detailed explanation-3: -When the Fed buys bonds from banks, their cash reserves at the Fed go up. As that liquidity cushion expands, banks have greater incentive to lend. Cheaper and more abundant credit then encourages more spending and investment.
Detailed explanation-4: -An increase in the supply of money works both through lowering interest rates, which spurs investment, and through putting more money in the hands of consumers, making them feel wealthier, and thus stimulating spending.