Question

question 6 of 10
if the federal reserve sells $50,000 in treasury bonds to a bank at 6%
interest, what is the immediate effect on the money supply?

a. it is decreased by $50,000.

b. it is decreased by $53,000.

c. it is increased by $50,000.

d. it is increased by $53,000.

Explanation:

When the Federal Reserve sells Treasury bonds to a bank, the bank pays the Fed $50,000 (for the bonds). This money is taken out of the bank's reserves (or available money), so the immediate effect is that the money supply (the amount of money in circulation or available for lending) decreases by the amount the bank pays, which is $50,000. The interest rate (6%) affects the future value or the cost of borrowing related to the bonds, but not the immediate change in the money supply from this transaction. So the money supply is decreased by $50,000.

Answer:

A. It is decreased by $50,000.