ECONOMICS
FEDERAL RESERVE
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Raise the discount rate.
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Raise the reserve requirement.
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Sell securities (bonds).
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Buy securities (bonds).
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Detailed explanation-1: -The Fed can increase the money supply by lowering the reserve requirements for banks, which allows them to lend more money. Conversely, by raising the banks’ reserve requirements, the Fed can decrease the size of the money supply.
Detailed explanation-2: -The correct answer is a. When the Fed wants to increase the money supply, it implements an expansionary monetary policy. This type of policy includes the decrease of the discount rate, the purchase of government securities, and the reduction of the reserve requirement ratio.
Detailed explanation-3: -To increase the (growth of the) money supply, the Fed could either buy bonds, lower the reserve requirement ratio, or lower the discount rate. To decrease the (growth of the) money supply, the Fed could either sell bonds, raise the reserve requirement ratio, or raise the discount rate.
Detailed explanation-4: -The Fed uses three primary tools in managing the money supply and pursuing stable economic growth. The tools are (1) reserve requirements, (2) the discount rate, and (3) open market operations. Each of these impacts the money supply in different ways and can be used to contract or expand the economy.