If the Fed wants to increase the supply of money with open-market operations, it purchases U.S. government bonds from the public on the open market. The purchase increases the number of dollars in the hands of the public, thus raising the money supply.
Full Answer
How does the Fed use open market operations to increase the money supply? The Fed buys bonds to INCREASE correct the amount of reserves that banks have on hand. When the Fed buys bonds, banks have MORE reserves and are able to lend MORE. As banks lend MORE, the money supply INCREASES.
Show how the Fed would increase the money supply by $3 million through open market operations. Because the current money multiplier is 10, the Fed would buy $300,000 worth of bonds, increasing the monetary base and so increasing the money supply by $3 million.
Why does the Fed have imperfect control over the money supply? a. Because the Fed does not know how much reserves will change when it buys or sells securities. b. Because of unpredictable changes in the public's desire to hold cash and banks' desires to hold reserves.
When the FOMC increases its target for the federal funds rate, the money supply will If bankers decide to hold more excess reserves because they are fearful of bank runs, the money supply