Question

How does the Federal Reserve reduce the money supply in the economy?

Answer 1

Answer:

Contractionary; Reserve ratio

Explanation:

If Fed wants to reduce the money supply in an economy then it must follow the contractionary monetary policy and it increases the reserve ratio.

Increase in the reserve ratio will lead to increase the amount of cash that banks are required to hold with Fed and with itself. And, this will also reduce the lending capability of the banks, so less amount of money would be used for giving loans which reduces the money supply in an economy.

Answer 2

Answer:

Using Contractionary monetary policy, the federal reserve increases Interest Rates to reduce the money supply in the economy​.