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
D)an increase in the discount rate

Question

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
D)​an increase in the discount rate

Quizplus · Accepted Answer

When a commercial bank uses excess reserves to extend a loan to a customer, it increases the amount of money that is circulating in the economy, therefore expanding the money supply.

Answer: B
 When a commercial bank purchases U.S. securities from the Fed, it increases the amount of reserves it holds, which can then be used to create more loans, therefore expanding the money supply.

Answer: None of the above
 Choice C represents an increase in reserve requirements, which would decrease the amount of money that banks can lend out, therefore contracting the money supply. Choice D represents an increase in the discount rate, which would make it more expensive for banks to borrow from the Fed, and therefore may limit their ability to extend loans, contracting the money supply.

Which of the Following Would Cause the U