Which of the following indicates the primary mechanism by which the money supply expands?
A) The U.S. Treasury prints additional currency.
B) The Fed purchases additional bonds, which increases the reserves available to the banking system.
C) The public decides to hold more currency rather than checking deposits.
D) The U.S. government purchases additional gold.

Question

Quizplus · Accepted Answer

The primary mechanism by which the money supply expands is through the actions of the Federal Reserve (the Fed). When the Fed purchases additional bonds or securities from the open market, it increases the amount of reserves available to the banking system. This, in turn, allows banks to lend out more money, which increases the overall money supply. Choice A is incorrect because the U.S. Treasury does not print currency to increase the money supply, as this would result in inflation. Choice C is incorrect because if the public decides to hold more currency, it would decrease the money supply, not increase it. Choice D is incorrect because the U.S. government purchasing additional gold does not directly affect the money supply.

Which of the Following Indicates the Primary Mechanism by Which