Question

The Fed wants to increase money supply. Which of the following methods can they use to achieve this goal?

Select one:

a. Increasing the interest rate that banks can earn for holding reserves

b. Decreasing unemployment

c. Increase the reserve requirement

d. Buying bonds

Answer 1

The Fed has got many ways to increase the money supply in the economy, here it would be buying bonds. This is known as the open market operations the Fed sell and buys government securities in the market to control the money supply in the economy, when they buys the bonds it increases the money supply in the economy, the opposite happens if they sell the bonds.

Increasing reserve requirement and interest rate both are part of the contractionary monetary policy that is it decreases the money supply in the economy. The interest rate is the cost of borrowing so increasing the interest rate actually reduces the public borrowing so the money supply.

Ans: d). Buying bonds.