If people decide to hold more currency relative to deposits,the money supply
A)falls.The Fed could lessen the impact of this by buying Treasury bonds.
B)falls.The Fed could lessen the impact of this by selling Treasury bonds.
C)rises.The Fed could lessen the impact of this by buying Treasury bonds.
D)rises.The Fed could lessen the impact of the by selling Treasury bonds.

Question

Quizplus · Accepted Answer

When people hold more currency relative to deposits, the money supply falls as there are fewer deposits in the banking system that can be used to create loans and increase the money supply. The Fed can lessen the impact of this by buying Treasury bonds, which injects new money into the system and replaces the money that was taken out by people holding more currency. This is known as open market operations and is a common tool of monetary policy. Selling Treasury bonds would have the opposite effect and lead to a further reduction in the money supply.

If People Decide to Hold More Currency Relative to Deposits,the