Explain how the Fed increases the money supply when it buys bonds ...

[WWatsford]

Explain how the Fed increases the money supply when it buys bonds in the open market.
 
  What will be an ideal response?

Question 2

The relationship between disposable income and consumption expenditure is
 
  A) positive.
  B) U-shaped.
  C) negative.
  D) nonexistent.
  E) not stable because it depends on whether the economy is in equilibrium or not.

[mtmmmmmk]

Answer to Question 1

The Fed buys bonds in the open market and pays for the bonds by transmitting funds to the bond dealer's deposit account in a bank, at which point it becomes part of the money supply. The Fed has just created money, because it has added to the reserve account of the bond dealer's bank, and the money supply increases by the amount of the purchase.

Answer to Question 2

A

[WWatsford]

Thanks for the timely response, appreciate it

[helenmarkerine]

Gracias!