When the Federal Reserve System wants to increase the money supply, which of the following actions would the Fed choose?
A) It purchases U.S. government securities.
B) It increases the discount rate.
C) It increases the required reserve ratio.
D) It sells bonds on the open market.

Question

Quizplus · Accepted Answer

When the Federal Reserve wants to increase the money supply, it can purchase U.S. government securities from banks. This in turn increases the banks' reserves, which then allows them to lend more money, ultimately increasing the money supply. The other options (increasing the discount rate and increasing the required reserve ratio) would actually decrease the money supply, and selling bonds on the open market would also decrease the money supply as it removes money from circulation.

When the Federal Reserve System Wants to Increase the Money