To reduce the money supply, the Federal Reserve:
A) buys government bonds.
B) sells government bonds.
C) creates demand deposits.
D) destroys demand deposits.

Question

Quizplus · Accepted Answer

When the Federal Reserve sells government bonds, it removes money from the economy, reducing the money supply. Therefore, choice B is the correct answer. The other choices are not effective ways to reduce the money supply, as buying government bonds and creating demand deposits add to the money supply, while destroying demand deposits would be a drastic measure that could have negative consequences for the banking system.

To Reduce the Money Supply, the Federal Reserve