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Both in present times and in the past, the Fed has used three tools to influence the money supply. Sort the below Fed actions into the following:

a. Increase the money supply (Increase), decrease the money supply (Decrease), or not a tool available to the Fed.
b. The Fed buys $100 million in short-term Treasury securities.
c. The Fed sells $200 million in mortgage-backed securities.
d. The Fed raises the interest rate charged on loans to banks.
e. The Fed sells $300 million in long-term Treasury securities.

Respuesta :

Baraq

Based on Macroeconomic theory, the Fed has used three tools to influence the money supply, which include "The Fed buys $100 million in short-term Treasury securities -- this is to increase the money supply (increase.)."

  • As the Fed buys the short-term Treasury securities, there would be more money in circulation.

The other tools to influence money supply include the following:

The Fed sells $200 million in mortgage-backed securities -- this is to decrease the money supply (decrease).

  • As the Fed sells mortgaged-backed securities, people would part away with their money, thus reducing the money supply.

The Fed raises the interest rate charged on loans to banks -- this is to decrease the money supply (decrease).

  • This is because people would not want to borrow, thereby reducing the money supply.

The Fed sells $300 million in long-term Treasury securities - this decreases the money supply (decrease)

Hence, in this case, it is concluded that there are various means by which the Federal government controls the money supply.

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