Question

Which of the following is NOT a way that the Fed uses the open market to control the money supply?

• To remove money from circulation, the Fed sells U.S. Treasury securities for cash.

• The Fed buys U.S. Treasury securities.

• The Fed dictates the amount of money that banks must keep in their vaults.

• The Fed gives bondholders cash in exchange for securities.

Answer 1

Under open market operations:

Option A is correct because by selling securities for cash will absorb all extra cash from the economy and reduce the money supply.

Option B is correct because buying securities against money will raise the money supply in the economy.

Option C is incorrect.

Option D is correct because giving cash in exchange of bonds will raise money supply in the economy.

As option C is not used to control money supply, it is a correct option.