Suppose the Federal Reserve were to engage in open-market operations by buying $100 million of U.S. Treasury bills. The money supply would:

A) stay the same.

B) decrease by $100 million.

C) increase by $100 million.

D) increase by more than $100 million.

The correct answer is: (D). increase by more than $100 million.

Federal reserve bank conducts expansionary monetary policy by engaging in Open Market Operation (OMO). The Fed purchases securities and deposits payments to private bond dealer's accounts in the commercial banks increasing amount of money available to be lend. Commercial banks lower interest rates to encourage more borrowing and through money multiplier effect, the money supply will increase more than initial purchase of $100M treasury bills by the government.