Question

If the head of the central bank wants to expand the supply of money, which of the following would do it? Explain how the policy impacts the money supply, and find the policies that might increase the money supply.

1. Increase the required reserve ratio

2. Decrease the required reserve ration

3. Increase the discount rate

4. Decrease the discount rate

5. Buy government securities in the open market

6. Sell government securities in the open market

7. (Review for the Great Depression) During the early 1930s there were a number of bank failures in the United States. What did this do to the money supply in economy? The New York Federal Reserve Bank advocated open market bond purchases. Would these purchases have reversed the change in the money supply and helped banks?.

Answer 1

If CB wants to increase money supply, it should decrease the required reserve ratio, so that the money Multiplier Increases. Money supply = monetary Base*money multiplier. And, Money multiplier = 1/required reserve ratio.

Also, other policies such as decreasing the interest rate will increase money supply. Decreased interest rate makes it less expensive for banks to borrow and thus increases the money supply.

Also, Buying government securities in the open market increases money supply in the economy by injecting money and buying government assets.