AP Macroeconomics Question 239: Answer and Explanation
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6. Which of the following would lead to a decrease in the money supply?
- A. The FED lowers the discount rate.
- B. The FED sells government securities in the secondary market.
- C. The federal government spends less money.
- D. The FED lowers reserve requirements.
- E. Taxes are reduced.
Correct Answer: B
(B) When the Fed sell securities in the secondary market they get paid with checks drawn on bank accounts. Bank reserves fall and the money supply falls by a multiple of the decline in bank reserves.