A combination of an increase in the discount rate and an open market sale of government securities by the Fed would:
A)increase the money supply.
B)decrease the money supply.
C)leave the money supply unchanged.
D)have an indeterminate effect on the money supply.

Question

A combination of an increase in the discount rate and an open market sale of government securities by the Fed would:
A)​increase the money supply.
B)​decrease the money supply.
C)​leave the money supply unchanged.
D)​have an indeterminate effect on the money supply.

Quizplus · Accepted Answer

An increase in the discount rate would discourage commercial banks from borrowing from the Fed, which would decrease the money supply. An open market sale of government securities by the Fed would also decrease bank reserves and decrease the money supply. Therefore, the combination of these two actions would decrease the money supply.

A Combination of an Increase in the Discount Rate and an Open