Which of the following policies can the Fed follow to increase the money supply?

Reduce the interest rate on reserves
Increase reserve requirements for banks
Reduce the quantity of funds available through the Term Auction Facility
Sell government bonds

Expert Solution

The interest rate on reserves refers to the interest earned by the banks for parking their money with the Fed. By reducing the interest rate on reserves, the Fed discourages the banks to deposit surplus funds with the Fed & encourage them to lend more money to the public. This allows an increase in the money supply in the economy.

Reduce the interest rate on reserves.

Dr. OWL answered 3 years ago

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