SIE Exam Question 814: Answer and Explanation

Question: 814

Which of the following describes actions taken by the Federal Reserve and their effect on the money supply?

(1) If the Federal Reserve sells government securities, it receives money in return, which increases the money supply.

(2) If the Federal Reserve sells government securities, it is considered contractionary policy.

• A. (1) only
• B. (2) only
• C. Both (1) and (2) are correct.
• D. Neither (1) or (2) are correct.

Correct Answer: B

Explanation:

If the Federal Reserve sells government securities, it receives money in return, which reduces the money supply. This is considered contractionary policy.