If the Federal Open Market Committee (FOMC) decides to expand the money supply, then:

Question

Quizplus · Accepted Answer

If the FOMC decides to expand the money supply, it will issue directions to purchase U.S. government securities from member banks, which will increase the reserves in the banks' accounts. This, in turn, will increase the amount of money that the banks can lend out to customers, thus expanding the money supply. Selling U.S. government securities, as in choice A, would decrease the money supply. Ordering new Federal Reserve notes, as in choice C, would have no immediate effect on the money supply, as these notes would only be put into circulation as banks request them. Raising the discount rate, as in choice D, would not expand the money supply, but rather contract it by making borrowing from the Federal Reserve more expensive for member banks.

If the Federal Open Market Committee (FOMC) Decides to Expand