A Treasury expenditure financed through borrowing from the Federal Reserve will cause the money supply
A) and bank reserves to rise by an equal amount.
B) and bank reserves to fall by an equal amount.
C) to rise but bank reserves to rise by a greater amount.
D) to rise by a greater amount than the rise in bank reserves.

Question

Quizplus · Accepted Answer

When the Treasury spends and borrows from the Federal Reserve, it increases the money supply in the economy, as the borrowed money is injected into circulation. However, this does not affect bank reserves in the same way. Bank reserves only increase by the amount of interest paid on the borrowed amount, which is typically lower than the actual amount borrowed. Therefore, the increase in the money supply will be greater than the increase in bank reserves, making option D the correct choice.

A Treasury Expenditure Financed Through Borrowing from the Federal Reserve