Contractionary Monetary Policy occurs when the Federal Reserve buys Government Bonds and Treasury Bills to increase the Money Supply. a. True b. False

Contractionary Monetary Policy occurs when the Federal Reserve buys Government Bonds and Treasury Bills to increase the Money Supply.
a. True
b. False

Answer

• b. False
  Explanation:
  There are two types of monetary policy that the federal government may employ to control the economy. Expansionary monetary policy is used to expand the economy by increasing money supply. On the other hand, contractionary monetary policy is used by the Fed when it wants to decrease amount of money in the economy and especially when economy is growing at a higher rate and risks inflation. To reduce money supply in the economy when applying contractionary monetary policy, the Fed sells bonds and securities to commercial banks to decrease the available cash in vaults (reserves) which eventually decreases amount of money the banks can lend as loans to borrowers.
  The statement should read:
  12. Expansionary Monetary Policy occurs when the Federal Reserve buys Government Bonds and Treasury Bills to increase the Money Supply.