Question

To increase the money supply in the economy, the Fed would:

a. carry out open market sales.
b. carry out open market purchases and/or decrease the interest rate paid on reserves.
c. carry out open market sales and/or raise the reserve ratio.
d. increase the prime interest rate.

Answer 1

To increase the money supply in the economy, the Fed would carry out open market purchases and/or decrease the interest rate paid on reserves.

Answer: Option B

Step-by-step explanation:

To increase the supply of money in the market and to give more money in the hands of the public, the Fed would make purchases of the securities in the open market. With this process, the people will sell their securities to the government and the government will give money to the public.

Therefore it will lead to the increase in the supply of money in the market and in the hands of the public. More over this can be done by reducing the interest rates that are to be paid on the reserves.