Question

In the 1970s, in response to recessions caused by an increase in the price of oil, the central banks in many countries increased their money supplies. The central banks might have done this by

Answer 1

The central bank could have increased money supply by purchasing bonds in the open market, decreasing discount rate, and decreasing reserve ratio.

Step-by-step explanation:

In the 1970s, when a number of countries were facing economic recessions due to the increase in oil price, the central bank of these countries increased their money supplies.

During a recession, the central bank of an economy on behalf of the government adopts an expansionary monetary policy. Through this policy, the central banks increase the money supply to correct the recessionary gap.

There is a number of tools that can be used for this purpose. A central bank can purchase government securities in the open market. This would increase the bank reserves and hence caused an increase in the money supply.

Other than that, a central bank can reduce the discount rate. This will make it cheaper for commercial banks to borrow from the central bank. This will increase bank reserves and money supply.

A central bank can also reduce the required reserve ratio. This will increase the total reserves of the commercial banks. As a result, the money supply will increase.