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:

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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:

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