Question

How should the Federal Reserve adjust its policy tools if it

wants to increase the money supply?
a Minimum reserve requirements
b Corporate taxes
c Welfare payments
d Interest on reserves
d Discount rate

Answer 1

To increase the money supply, the Federal Reserve can adjust its policy tools in three ways: changing reserve requirements, changing the discount rate, and conducting open-market operations.

Step-by-step explanation:

Monetary policy is one of the Federal Reserve's most important responsibilities. It involves the Federal Reserve's decision to either expand or contract the money supply in order to influence the cost of credit. If the Federal Reserve wants to increase the money supply, it can adjust its policy tools in the following ways:

1. Changing reserve requirements: The central bank can lower the reserve requirement, allowing banks to lend out more money and increasing the money supply.
2. Changing the discount rate: The central bank can lower the discount rate, which encourages banks to borrow more money and expand their lending activities, increasing the money supply.
3. Open-market operations: The central bank can buy government securities, injecting money into the economy and increasing the money supply.