Question

Which of the following is a tool used by the central bank to control the money supply?

1) open market operations
2) discount rate
3) reserve requirements
4) interest on reserves

Answer 1

The central bank uses open market operations, reserve requirements, and discount rates to control the money supply.

Step-by-step explanation:

A central bank has three traditional tools to control the money supply:

1. Open market operations: involves buying and selling government bonds with banks.
2. Reserve requirements: determine the level of reserves a bank is legally required to hold.
3. Discount rate: interest rate charged by the central bank on loans to commercial banks.

The most commonly used tool is open market operations where the central bank buys or sells government bonds to influence bank reserves and interest rates.