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Which of the following actions of a central bank would decrease the money supply in the economy?A.Increase the target interest rateB.Decrease the minimum reserve requirement.C.Reduce the interest rate paid on bank reserve.D.Buy bonds through open market operations.

Question

Which of the following actions of a central bank would decrease the money supply in the economy?A.Increase the target interest rateB.Decrease the minimum reserve requirement.C.Reduce the interest rate paid on bank reserve.D.Buy bonds through open market operations.

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Solution

The action of a central bank that would decrease the money supply in the economy is:

A. Increase the target interest rate

Increasing the target interest rate makes borrowing more expensive, which can reduce spending and slow down the economy, thereby decreasing the money supply.

On the other hand, decreasing the minimum reserve requirement (option B), reducing the interest rate paid on bank reserves (option C), and buying bonds through open market operations (option D) are typically used to increase the money supply. These actions make borrowing cheaper and increase the amount of money in circulation.

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