Question

 

To increase the money supply, the Fed could 

A. sell government bonds. 

B. decrease the discount rate.

C. increase the reserve requirement.

D. None of the above is correct.

 

In recent years the Federal Open Market Committee has focused on a target for

A. M1 growth.

B. the federal funds rate.

C. the number of Treasury Securities issued by the federal government. 

D. total reserves of banks.

Answer 1

1. A selling of government bonds decreases the money supply. When the Fed sells bonds the commercial banks and public will purchase it. This will cause a fall in money supply.

The discount rate is the rate at which the Fed gives financial accommodation to commercial banks. A decrease in discount rate encourages more borrowing by the commercial banks from the Fed. Thus money supply increases.

Increase in reserve requirements reduce the lending of commercial banks and reduce the money supply. This is because when the reserve requirement is increased the commercial banks have to keep a large part of their deposit as reserves and they can lend less.

B. decrease the discount rate.

2. In recent years the Federal Open Market Committee has focused on the federal fund rate to control money supply. This is because the change in federal fund rate directly influences short term rates on loans which speed up the increase or decrease in money supply.

B. the federal fund rate.