Question

If a central bank wanted to increase the money supply, what would it most likely do? a. It would make open-market purchases and raise the bank rate. b. It would make open-market purchases and lower the bank rate. c. It would make open-market sales and lower the bank rate. d. It would make open-market sales and raise the bank rate.

Answer 1

b. It would make open-market purchases and lower the bank rate

Step-by-step explanation:

If the central bank wants to increase the supply of money in the economy it must conduct the purchase of securities in the open market, when the central bank will purchase securities it will offer money to the public in return for the purchase, leading to an increase in the supply of money. The central bank can also decrease the bank rate, a fall in the bank rate will make it cheaper for the commercial banks to lend money, so they will also charge less rate of interest on the loans offered to the public, hence incentivising people to take loans from the bank and thus increasing the supply of money in the economy.