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Suppose banks decide to hold more excess reserves relative to deposits. Other things the same, this action will cause the
a. money supply to fall. To reduce the impact of this the Fed could sell Treasury bonds.
b. money supply to fall. To reduce the impact of this the Fed could buy Treasury bonds.
c. money supply to rise. To reduce the impact of this the Fed could sell Treasury bonds.
d. money supply to rise. To reduce the impact of this the Fed could buy Treasury bond

Respuesta :

Answer:

The correct answer is option b.

Explanation:

If banks decide to hold more excess reserves relative to deposits, they will provide fewer loans. Fewer loans will cause reduction in investment because of lack of funds. This will cause the money supply to fall.

Federal Reserve can increase the money supply by buying treasury bonds. When Feds buy treasury bonds they pay for it. This increases the money supply in the market.  

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