Question

. If the Governor of the Palestinian monetary authority want to expand the supply of money in Palestine in 2020, which of the following would do it? Explain your answer.

a. Increase the required reserve ratio

b. Decrease the required reserve ratio c. Increase the discount rate d. Decrease the discount rate

e. Buy government securities in the open market f. Sell government securities in the open market

Answer 1

Following policy the Governor of the Palestinian must follow to expand the supply of money:

b. Decrease the required reserve ratio: With lower reserve ratio, the banks in Palestine have to maintain less reserve balances and can lend out more loans and advances. This will increase the money supply in the economy.

d. Decrease the discount rate: With lower discount rate, commercial banks of Palestine can borrow more loans from central bank at lower cost and therefore can increase their lending capacity which will increase money supply.

e. Buy government securities in the open market: With the purchase of government securities, the central bank of Palestine can inject money in the market which will increase the money supply.