If the Treasury finances an expenditure by borrowing from the Fed, the money supply
A) and bank reserves fall.
B) and bank reserves rise.
C) rises while bank reserves remain unchanged.
D) remains unchanged as bank reserves rise.

Question

Quizplus · Accepted Answer

When the Treasury borrows from the Fed, the Fed purchases Treasury securities, paying with newly created money. This increases the reserves of the banks, which in turn increases the money supply as banks can lend more based on their increased reserves.

If the Treasury Finances an Expenditure by Borrowing from the Fed