As a result of targeting free reserves, the Fed will tend to
A)expand the money supply during expansions and contract the money supply during recessions.
B)contract the money supply during expansions and expand the money supply during recessions.
C)expand the money supply during both expansions and recessions.
D)contract the money supply during both expansions and recessions.

Question

Quizplus · Accepted Answer

Targeting free reserves means that the Fed is trying to control the amount of money that banks have on hand. When the economy is expanding, banks tend to have more free reserves, which can lead to inflation. To prevent this, the Fed will sell Treasury securities, which will reduce the amount of money in the banking system and slow down the economy. When the economy is in a recession, banks tend to have less free reserves, which can lead to deflation. To prevent this, the Fed will buy Treasury securities, which will increase the amount of money in the banking system and stimulate the economy.

As a Result of Targeting Free Reserves, the Fed Will