Question

Which action is most likely to result in a decrease in the money supply?

Responses

The government sells a new batch of Treasury bonds.

The government sells a new batch of Treasury bonds.

The required reserve ratio for banks is decreased.

The required reserve ratio for banks is decreased.

The discount rate on overnight loans is lowered.

The discount rate on overnight loans is lowered.

The Federal Reserve Bank buys Treasury bonds.

Answer 1

The action most likely to result in a decrease in the money supply is:

**The government sells a new batch of Treasury bonds.**

When the government sells Treasury bonds, it pulls money out of circulation as investors buy these bonds, effectively reducing the amount of money in the economy.

In contrast:
- Decreasing the required reserve ratio allows banks to lend more money, potentially increasing the money supply.
- Lowering the discount rate on overnight loans encourages banks to borrow more, which can also increase the money supply.
- The Federal Reserve buying Treasury bonds injects money into the economy, increasing the money supply.