Question

The Federal Reserve's tools to control the money supply include open-market operations, the discount rate, and interest payments on reserves.

a. How should each instrument be changed if the Fed wishes to decrease the money supply?
b. Will the change affect the monetary base and/or the money multiplier?

Answer 1

PART-1

How should each instrument be changed if the Fed wishes to decrease the money supply?

The Fed would deportment open-market sales, increase the discount rate, and raise interest paid on reserves.

PART-2)

Will the change affect the monetary base and/or the money multiplier?

The money multiplier refers to the capacity of money that financial institute like banks produce with each dollar of funds. Money base is exaggerated by the open-market processes and discount rate. Any alteration in interest expenditures on reserves modifies the money multiplier.