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When the Fed buys government bonds, the money supply increases and the federal funds rate decreases...

When the Fed buys government bonds,

the money supply increases and the federal funds rate decreases

the money supply decreases and the federal funds rate increases

the money supply increases and the federal funds rate increases

the money supply decreases and the federal funds rate decreases
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Answer #1

The money supply increases and federal fund rate decreases

Federal fund rate is the rate at which bank borrows money from each other. When Fed buys government bonds from banks then it increases the reserve of banks as Fed buys bonds in exchange of cash. This increases the ability of banks to give credit and lend more. In order to lend more the banks decreases the federal fund rate to attract more borrowers. This overall increases the money supply in the economy.

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