Which of the following policy actions by a country’s central bank would increase the money supply in the economy?a.Raising the interest paid on bank reserves deposited with the central bank.b.Increasing the policy rate.c.Buying government bonds through open market operations.d.Increasing the minimum reserve requirements.
Question
Which of the following policy actions by a country’s central bank would increase the money supply in the economy?a.Raising the interest paid on bank reserves deposited with the central bank.b.Increasing the policy rate.c.Buying government bonds through open market operations.d.Increasing the minimum reserve requirements.
Solution
In the context of monetary policy, the central bank can influence the money supply in the economy through various tools. Let's analyze each option:
a. Raising the interest paid on bank reserves deposited with the central bank: This action would actually decrease the money supply. When the central bank raises the interest paid on reserves, banks have an incentive to hold more reserves at the central bank rather than lending them out, which reduces the money supply.
b. Increasing the policy rate: This action would also decrease the money supply. When the central bank increases the policy rate, it becomes more expensive for banks to borrow money. This reduces the amount of money banks have available to lend, which decreases the money supply.
c. Buying government bonds through open market operations: This action would increase the money supply. When the central bank buys government bonds, it pays for these bonds by creating new money, which increases the money supply.
d. Increasing the minimum reserve requirements: This action would decrease the money supply. When the central bank increases the minimum reserve requirements, banks must hold more reserves and have less money available to lend, which reduces the money supply.
So, the correct answer is c. Buying government bonds through open market operations.
Similar Questions
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