Which of the following policy actions by a country’s central bank would increase the money supply in the economy?a.Increasing the policy rate.b.Increasing the minimum reserve requirements.c.Reducing the interest paid on bank reserves deposited with the central bank.d.Selling government bonds through open market operations.
Question
Which of the following policy actions by a country’s central bank would increase the money supply in the economy?a.Increasing the policy rate.b.Increasing the minimum reserve requirements.c.Reducing the interest paid on bank reserves deposited with the central bank.d.Selling government bonds through open market operations.
Solution
The correct answer is c. Reducing the interest paid on bank reserves deposited with the central bank.
Here's why:
a. Increasing the policy rate: This would actually decrease the money supply. When the policy rate (also known as the interest rate) is increased, borrowing becomes more expensive. This discourages banks from borrowing, which in turn reduces the amount of money they have to lend to consumers. As a result, the money supply decreases.
b. Increasing the minimum reserve requirements: This would also decrease the money supply. When the minimum reserve requirement is increased, banks are required to hold more money in reserve. This reduces the amount of money they have available to lend to consumers, which decreases the money supply.
c. Reducing the interest paid on bank reserves deposited with the central bank: This would increase the money supply. When the interest paid on reserves is reduced, banks have less incentive to hold money in reserve. This means they have more money available to lend to consumers, which increases the money supply.
d. Selling government bonds through open market operations: This would decrease the money supply. When the central bank sells government bonds, it is essentially taking money out of the economy and giving it to the government. This reduces the amount of money available in the economy, which decreases the money supply.
Similar Questions
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