The Fed buys $100 million of bonds from the public and also lowers the reserve requirement r. What will happen to the money supply? A. The money supply will increase. B. The money supply will not change. C. The money supply will decrease. D. The effect on the money supply is ambiguous.

The correct answer is option A.

Explanation:

When the government buys from the public it will pay them back. So the purchase of $100 million of bonds by the government means $100 million was paid to the public.

Also, if the reserve requirement is lowered, it means the commercial banks can increase lending.

Both these actions combined will lead to an increase in the money supply.