Question

A commercial bank sells a treasury bond to the federal reserve for $100,000. (assume that all proceeds from this bond sale are lent out) the money supply: is unaffected by the transaction. increases by $100,000. decreases by $100,000.

Answer 1

When a commercial bank sells a treasury bond to the Federal Reserve amounting to $100,000, the money supply increases by $100,000. In this case, the commercial bank who sold the treasury bond with cash will be able to increase the economy’s money supply because there is an exchange of bond and cash between the bank and the Federal Reserve.