Question

which of the following tools can the fed use to contract the money supply? to expand the money supply? items (9 items) (drag and drop into the appropriate area below) increasing the discount rateraising the reserve requirementlowering the reserve requirementlowering the interest on reserve balancesbuying short-term u.s. treasury securitiesselling short-term u.s. treasury securitiesraising the interest on reserve balancesdecreasing the discount ratequantitative easing categories contract money supply drag and drop here expand money supply

Answer 1

To contract the money supply, the Fed can increase the discount rate, raise the reserve requirement, and sell short-term U.S. Treasury securities, whereas to expand it, they can decrease the discount rate, lower the reserve requirement, lower interest on reserves, buy short-term U.S. Treasury securities, and use quantitative easing.

Step-by-step explanation:

The Federal Reserve (Fed) can use several tools to either contract or expand the money supply as part of its monetary policy. To contract the money supply, the Fed can:

• increase the discount rate,
• raise the reserve requirement, and
• sell short-term U.S. Treasury securities.

Conversely, to expand the money supply, the Fed may:

• decrease the discount rate,
• lower the reserve requirement,
• lower the interest on reserve balances,
• buy short-term U.S. Treasury securities, and
• engage in quantitative easing (QE) by purchasing long-term government and private mortgage-backed securities.

These actions are meant to influence the interest rate and stimulate

aggregate demand

, which can be necessary during periods of economic downturn, such as the 2008 recession and the COVID-19 pandemic in 2020.