Question

@shadow Describe the effect each action below will have on the money supply and explain your reasoning.

Answer 1

I just need to correct it

Answer 2

1. The Fed raises the discount rate from 5 percent to 10 percent.

If the Fed raises the discount rate from 5 to 10 percent, it makes it more costly for banks to borrow from the Fed. Since the discount rates are higher, banks are more than likely to hold on to excess
Reserves.

Answer 3

What happens to the money supply?

Answer 4

I happen to know a little bit about economics myself. @Shadow, definitely correct me if I get anything wrong. If the bank has a harder time borrowing from the Fed and tends to hold on to reserves, that means they are giving out less loans. This means there is effectively less money to spend, so the money supply decreases.

Answer 5

Thanks!

Answer 6

4. The Fed buys $5 billion worth of Treasury bonds on the open market.

If the Fed buys $5 billion worth of Treasury bonds with newly printed money on the open market, there will be inflation. If they buy them with tax dollars from the public, it will lower the debt. If they buy them with new taxes, it will cause deflation. Not concerned with printing new money here but the Fed buying bonds within the existing money supply.

Does the money supply go up or down?

Answer 7

I already did these questions but my teacher wants me to correct them and I am not understanding the concept well.

Answer 8

@SmokeyBrown

Answer 9

If I understand the concept correctly, when the Fed buys bonds from the Treasury, they are lending the Treasury money. So, they are giving the Treasury more money temporarily, which will be paid back later. This increases the Treasury's funds and, as a result, increases the money supply.

Answer 10

Banks decide to keep more of their assets as reserves in order to avoid risking a shortage of the required reserve.


If Banks decide to keep more of their assets as reserves in order to avoid risking a shortage of the required reserve,it would just cause the supply of money to grow at a slower pace. So it would decrease the rate of growth of the money supply.

Answer 11

IS this correct?

Answer 12

Yup, I'd agree with that.

Answer 13

3. The Fed sells $5 billion worth of Treasury bonds on the open market.

If the Fed sells $5 billion worth of Treasury bonds on the open market, the money supply would stay the same because no new money would be created. The question is about supply of existing money, not about new money.

If the Fed sells bonds, where does the money come from to buy them? What does that mean for the money supply?

@smokeybrown

Answer 14

@SmokeyBrown If you could just correct this

Answer 15

Let me see... I *think* that the Fed selling bonds would decrease the money supply, since they are trading bonds to the public and taking in money. Sort of like the example where the Fed buys bonds from the Treasury, but in reverse.
If the money supply does stay constant, I would say that the Fed must be loaning out the money it got from selling bonds, which puts money back in the market, keeping money supply the same.
But in the simplest case, Fed selling bonds would decrease money supply.