Question

6. How will the following actions affect the money supply? (a) a reduction in the discount rate (b) an increase in the reserve requirements (c) the purchase by the Fed of $100 million of U.S. securities from a commercial bank (d) the sale by the Fed of $200 million of U.S. securities to a private investor

Answer 1

Answer

(A) suppose fed reduce discounting rate or interest rate then borrowing by commercial banks will increase so their lending level also increase because of high excess reserve of money. so that will increase money supply in economy.

(B) increase in reserve requirment reduce the money supply because if banks maintain more amount of reserve then they should lend less. so money supply in economy reduce

(C) if FED purchase securities from commercial banks then it will increase money supply because fed pay amount to commercial banks for that securities. so if commercial banks get money then their lending power increases so that will increase money supply

(D) FED sale securities to private investment then it will reduce money supply because amount paid by investors will reduce Money supply of investment. so that will reduce circulation of money. so money supply reduce.