Suppose the Federal Reserve purchases 20 million dollars of Treasury Bills. The FED pays for this purchase by increasing the balance in the reserve accounts of those banks from whom it bought the securities. This operation will result in:

Question

BlackTom AI · Accepted Answer

The scenario describes the Fed buying Treasury Bills and paying by increasing the reserve balances of banks from which it purchased the securities. This action directly affects banks' reserves and, through the money multiplier, the broader money supply.
Option 1: 'Decreasing the money supply' — This is incorrect. An open market purchase typically increases bank reserves, which, via the money multiplier, expands the money supply rather than contracts it. There is no mechanism here that would reduce the monetary base or the overall money stock in the banking system.
Option 2: 'Increasing the money supply' — This statement is true. By adding reserves to banks’ balance sheets, the Fed increases the capacity for these banks to create deposits through lending. As deposits rise, the monetary base rises and, with the multiplier effect, broader money supply grows. This aligns with standard monetary policy transmission.
Option 3: 'Not enough information to answer' — While real-world outcomes depend on the banks’ balance sheet behavior and reserve requirements, the canonical effect of an open market purchase is an increase in reserves and typically an increase in the money supply. The information given suffices to conclude an expansion in money supply.
Option 4: 'No change in the money supply' — This is incorrect. The action described changes the reserves held by banks, which, under typical conditions, translates into an increase in deposits and thus an increase in the money supply; a 'no change' outcome would require offsetting actions that are not mentioned here.
In summary, the described operation is best understood as increasing the money supply due to the expansion of bank reserves and the subsequent lending capacity granted by the monetary multiplier.

ECON 2002.01 AU2025 (21333) Final Exam- Requires Respondus LockDown Browser

Suppose the Federal Reserve purchases 20 million dollars of Treasury Bills. The FED pays for this purchase by increasing the balance in the reserve accounts of those banks from whom it bought the securities. This operation will result in:

View Explanation

Log in for full answers

Similar Questions

Credit cards are considered part of M1 money supply because they can be used for transactions.

Suppose the Federal Reserve buys bonds from the banking system, the money supply curve

Jane has $200 in cash, $1,000 in savings deposits, and $5,000 invested in mutual funds. What most accurately describes her M1 holdings?

The relationship between bank reserves and the money supply is

If you withdraw $100 from your checking account and use the money to purchase a 14-month CD (certificate of deposit), M1 [ Select ] and M2 [ Select ]

According to the monetary theory we have learned in this class, all else the same, which of the following events will cause the supply of money to increase, in both the scarce reserves and ample reserves eras?

Credit cards are considered part of M1 money supply because they can be used for transactions.

More Practical Tools for International Students

Exam Browser Assistant

Stylized Writing Assistant

Plagiarism Checker Assistant

Citation Assistant

In-Class Translation Assistant

Class Notes Assistant

Quiz Search Assistant

Past Exam Questions by School

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler