Which of the following would cause the U.S. money supply to expand?
A)A commercial bank using excess reserves to extend a loan to a customer
B)A commercial bank purchasing U.S. securities from the Fed as an investment
C)An increase in reserve requirements by the Fed
D)An increase in the discount rate by the Fed
E)An increase in the tax rate by the government

Question

Quizplus · Accepted Answer

When a commercial bank uses its excess reserves to extend a loan to a customer, the money supply expands as the bank creates new money in the process of making the loan.

Answer: B
 When a commercial bank purchases U.S. securities from the Fed as an investment, it increases the reserves of the bank, allowing the bank to create more money by extending new loans. As a result, the money supply expands.

Answer: None of the following
 An increase in reserve requirements by the Fed (C) reduces the amount of money that banks can lend out, thus decreasing the money supply. An increase in the discount rate by the Fed (D) increases the cost of borrowing from the Fed, making it more expensive for banks to access additional funds, hence reducing the money supply. An increase in the tax rate by the government (E) reduces the amount of disposable income available to individuals, decreasing their ability to spend on goods and services, and leading to a decrease in the money supply.

Which of the Following Would Cause the U