The Fed increases the reserve requirement and makes open market purchases.Which of these by itself will increase the money supply?
A) neither the increase in the reserve requirement nor the open market purchases
B) both the increase in the reserve requirement and the open market purchases
C) only the increase in the reserve requirement
D) only the open market purchases

Question

Quizplus · Accepted Answer

Only the open market purchases will increase the money supply because it involves the Fed buying bonds from banks, which gives banks more money to lend out, increasing the overall money supply. Increasing the reserve requirement will actually decrease the money supply because it requires banks to keep more money in reserve, reducing the amount they can lend out. Therefore, choice D is the correct answer as it states that only the open market purchases will increase the money supply.

The Fed Increases the Reserve Requirement and Makes Open Market