Question

If the federal reserve sells 50,000$ in treasury bonds to a bank at 6% interest , what is the immediate effect on the money supply ?

Answer 1

The money supply would decrease by $50,000

Answer 2

The Federal Reserve is responsible for the country's monetary policy, which consists in raising interest rates and buying / selling government bonds. The purpose of monetary policy is to keep inflation under control while maintaining the country's financial health. Inflation is a monetary phenomenon, caused by excess currency in circulation. So when Fed buys bonds, it will be decreasing the amount of cash in circulation.