1. Contrast the actions a central bank would take to increase the quantity of money in...

1. Contrast the actions a central bank would take to increase the quantity of money in the economy with the actions it would take to produce the opposite affect.

Expert Solution

In order to increase the quantity of money, the central bank would do the following:

1. Lower the reserve requirements: This would increase the money available with banks to loan out.

2. Lower the discount rate: This would help banks borrow more from the central bank and increase the money supply.

3. Open market purchase: When the central bank conducts open market purchase of securities, money flows from the central bank to the commercial banks and money supply increases.

In order to decrease the quantity of money, the central bank would do the following:

1. Increase the reserve requirements: This would decrease the money available with banks to loan out.

2. Increase the discount rate: This would increase the costs of borrowing by banks from the central bank. So, the money supply would fall.

3. Open market sale: When the central bank conducts open market sale of securities, money flows from the banking system to the central bank and the money supply falls.

Rahul Sunny answered 1 year ago

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