Question

If people decide to hold less currency relative to deposits, the money supply
a. falls. The Fed could lessen the impact of this by buying Treasury bonds.
b. falls. The Fed could lessen the impact of this by selling Treasury bonds.
c. rises. The Fed could lessen the impact of this by buying Treasury bonds.
d. rises. The Fed could lessen the impact of this by selling Treasury bonds.

Answer 1

Answer: Option (d) is correct.

Explanation:

If people decided to hold less currency relative to deposits, then the money supply rises in the economy. Since large portion of currency they deposited into banks. As these deposits increases money supply in the economy through money multiplier.

Fed could try to neutralize the impact of this factor by selling treasury bonds to public. Therefore, money supply decreases to some extent.