Final answer:
To increase the money multiplier, the Federal Reserve can either reduce the desired reserve ratio, allowing banks to increase lending due to lesser reserves, or it can purchase government securities in the open market, adding reserves to the banking system and thus facilitating more lending.
Step-by-step explanation:
The student's question pertains to macroeconomic policy and centers on identifying which actions can increase the size of the money multiplier. The money multiplier is the amount by which the base money (or monetary base) in the economy is expanded through the banking system's ability to lend money. It is influenced by the reserve ratio and by monetary policy actions.
Answering the student's question:
- A reduction in the desired reserve ratio will increase the money multiplier because banks will be required to hold less money in reserves, allowing them to lend out more, which increases the potential for deposit expansion.
- An open market purchase of government securities by the Fed will also increase the money multiplier. When the Fed purchases securities, it adds reserves to the banking system, facilitating more lending.
- An increase in the currency drain ratio - money held by the public as cash - would reduce the money multiplier, not increase it, because it decreases the amount of reserves available for banks to lend.
- An increase in the size of open market operations can either increase or decrease the money multiplier depending on whether the operation is a purchase (which increases it) or a sale (which decreases it).
- An open market sale of government securities by the Fed will decrease the money multiplier by removing reserves from the banking system, thus reducing the banks' ability to lend.
Therefore, the correct options that increase the size of the money multiplier are a reduction in the desired reserve ratio and an open market purchase of government securities by the Fed.