If the Federal Open Market Committee decides to expand the money supply, then it will
A)raise the discount rate to member banks.
B)issue directions to purchase government securities, thus putting more reserves in member banks.
C)issue directions to sell government securities, thus taking reserves from member banks.
D)order new Federal Reserve notes delivered to member banks.

Question

Quizplus · Accepted Answer

When the Federal Open Market Committee (FOMC) decides to expand the money supply, it issues directions to purchase government securities. This puts more reserves in member banks, allowing them to then expand their lending and increase the money supply. The FOMC does not raise the discount rate (choice A) as this would discourage borrowing and lending, thus decreasing the money supply. Option C is also incorrect as selling government securities would reduce reserves in member banks, thus decreasing the money supply. Option D is also incorrect as ordering new Federal Reserve notes has no direct impact on the money supply.

If the Federal Open Market Committee Decides to Expand the Money