If the Fed decides to engage in an open market operation to increase the money supply, what will it do?
A) Sell Treasury bonds, bills, or notes on the bond market.
B) Buy Treasury bonds, bills, or notes on the bond market.
C) Increase the required reserve ratio.
D) Increase the fed funds rate.

Question

Quizplus · Accepted Answer

When the Fed wants to increase the money supply, it buys Treasury bonds, bills, or notes on the open market. This increases the amount of money in circulation and lowers interest rates. Selling Treasury bonds, bills, or notes on the bond market would decrease the money supply and raise interest rates. Increasing the required reserve ratio and the fed funds rate are other tools the Fed can use to control the money supply, but they would have the opposite effect of decreasing the money supply and raising interest rates.

If the Fed Decides to Engage in an Open Market