Question

Increasing the monetary base may not lead directly to an increase in the money supply if

A) the Fed is issuing new Federal Reserve Notes

B) the Fed is behind on check-clearing

C) banks are lending aggressively

D) the Fed is paying interest on reserves

Answer 1

Increasing the monetary base may not lead directly to an increase in the money supply if the Fed is paying interest on reserves

Therefore correct answer is option D) the Fed is paying interest on reserves

We know that

Monetary base = Currency + Reserves

If increasing the monetary base may not lead directly to an increase in the money supply means currency in not increasing in the above equation, monetary base may increasing because on increase in reserves. And the reserve may increase if the Fed is paying interest on reserves.

All other measures like the fed is issuing new Federal Reserve Notes, the Fed is behind on check-clearing and banks are lending aggressively may increase money supply directly.