Explain how each of the following changes the money supply
a. the Fed buys bonds
b. the Fed auctions credit
c. the Fed raises the discount rate
d. the Fed raises the reserve requirement
a. If the Fed buys bonds, it pays for them with reserves so banks will have more reserves and can lend more which will create more deposits and so more money.
b. The Fed makes loans to the highest bidders. The Fed lends to a bank by increasing the banks' deposits at the Fed which are part of reserves. When reserves increase banks have more to lend and so the money supply increases.
b. If the Fed raises the discount rate banks will borrow less from the Fed, and so have fewer reserves, which decreases the money supply.
c. If the Fed raises the reserve requirement, banks will have to hold more of their deposits as reserves and so will have less to lend out. With less to lend out, deposits and the money supply decrease.
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