The more funds that the Federal Reserve makes available for banks to borrow through the Term Auction Facility, the _____ the monetary base and the _____ the money supply.
A) smaller; smaller
B) smaller; greater
C) greater; greater
D) greater; smaller

Question

Quizplus · Accepted Answer

When the Federal Reserve makes more funds available for banks to borrow through the Term Auction Facility, it increases the monetary base because it is directly adding to the reserves that banks hold. As banks have more reserves, they can lend more, which in turn increases the money supply through the money multiplier effect.

The More Funds That the Federal Reserve Makes Available for Banks