Question

Which of the following would NOT decrease the supply of money in a fiat money economy?

	a.	The Federal Reserve decides to sell existing treasury securities.
	b.	The Federal Reserve increases the required reserve ratio.
	c.	The Federal Reserve decides to link the value of money to a scarce, rare earth metal.
	d.	The Federal Reserve decides to link the value of money to water (a commodity).
	e.	The Federal Reserve increases the discount rate.

Answer 1

In a fiat money economy, paper currency is used which has no intrinsic value. It has a legal tender because it is proposed by the government. Changing the reserve ratio or buying and selling of government securities will influence the money supply in such an economy. Discount rate will also influence the money supply when paper currency is used because all of these measures will change the amount of reserves in the banking system. However linking the value of money to earth metal will not change banking reserves.

Option C is correct.