The Federal Reserve uses open market operations to control the money supply when it A

Economics Jan 28, 2021

The Federal Reserve uses open market operations to control the money supply when it

A. issues government bonds to finance the federal government's deficit.

B. purchases government bonds to decrease the money supply.

C. purchases government bonds to increase the money supply.

D. sells government bonds to increase the money supply.

Expert Solution

Answer: C

Open market operation include the sale and purchase of government bonds to manipulate the money supply. The Fed buying bonds though increases the money supply and selling bonds decreases the money supply. This is because in the latter the Fed is taking cash in exchange for assets. In the former it is providing newly created cash in exchange for assets.

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