Question

The money supply increases when the Fed:______ a. buys bonds. The increase will be larger, the smaller is the reserve ratio. b. buys bonds. The increase will be larger, the larger is the reserve ratio. c. sells bonds. The increase will be larger, the smaller is the reserve ratio. d. sells bonds. The increase will be larger, the larger is the reserve ratio.

Answer 1

Answer:

buys bonds. The increase will be larger, the smaller is the reserve ratio.

Explanation:

Open market purchase is one of the monetary tools used to increase money supply. When an open market purchase takes place, the Fed collects bonds and gives money.

The reserve requirement is the amount that must be kept as reserves by banks.

If the reserve ratio is too high, it would limit the impact of the open market purchase.

Therefore, the smaller the reserve ratio, the higher the increase would be.

I hope my answer helps you.