Math

QuestionHow will the Fed's policy action change the money supply? Use only the actions corresponding to your choice in the previous part.
The money supply increases The money supply decreases \square \square
Answer Bank
The Fed buys bonds The Fed sells bonds The Fed buys foreign currency The Fed sells foreign currency
The Fed increases the reserve ratio The Fed decreases the reserve ratio
The Fed increases the rate at which it lends to member banks The Fed decreases the rate at which it lends to member banks

Studdy Solution

STEP 1

1. The Federal Reserve (Fed) can influence the money supply through various policy actions.
2. We need to determine which actions increase or decrease the money supply.

STEP 2

1. Identify actions that increase the money supply.
2. Identify actions that decrease the money supply.

STEP 3

The Fed buys bonds: When the Fed buys bonds, it injects money into the economy, increasing the money supply.

STEP 4

The Fed decreases the reserve ratio: Lowering the reserve ratio allows banks to lend more, increasing the money supply.

STEP 5

The Fed decreases the rate at which it lends to member banks: This makes borrowing cheaper for banks, encouraging lending and increasing the money supply.

STEP 6

The Fed sells bonds: Selling bonds takes money out of the economy, decreasing the money supply.

STEP 7

The Fed increases the reserve ratio: Raising the reserve ratio requires banks to hold more reserves, reducing their ability to lend and decreasing the money supply.

STEP 8

The Fed increases the rate at which it lends to member banks: This makes borrowing more expensive for banks, discouraging lending and decreasing the money supply.
The actions that increase the money supply are: - The Fed buys bonds - The Fed decreases the reserve ratio - The Fed decreases the rate at which it lends to member banks
The actions that decrease the money supply are: - The Fed sells bonds - The Fed increases the reserve ratio - The Fed increases the rate at which it lends to member banks

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