Question

In the model of the money supply process, the Federal Reserve's role in influencing the money supply is represented by

A) both the required reserve ratio and the market interest rate.
B) the required reserve ratio, nonborrowed reserves, and borrowed reserves.
C) only borrowed reserves.
D) only nonborrowed reserves.

Answer 1

both the required reserve ratio and the market interest rate (A)

Step-by-step explanation:

The Federal Reserves influences the money supply by manipulating required money banks deposit reserve ratio, market interest rate and open market operations. If the Federal reserves wants to increase the supply of money, it will reduce the required reserve ratio by banks. Thus commercial bank would have more money at their disposal to lend to clients.

Also, the Federal Reserves, which is the apex bank and regulator of ALL bank, play the role of ''lenders of last resort'', hence they lend money to commercial banks, when they are constrained financially, by this, banks are able to lend to customers with ease.

Furthermore, the Federal reserves also buys and sells securities, which it uses to either increase the supply of money or reduce the supply of money in the economy, and can use this model to also address economic problem such as inflation.