Question

What’s the best way for the FED (Federal Reserve Board) to create a tight money market? Buy government bonds and sell government bonds Sell government bonds Buy government bonds Sell government bonds and raise the discount rate

Answer 1

Answer: Sell government bonds and raise the discount rate

Explanation:

Fed uses open market operations for controlling the money supply in the economy. If fed wants to create a tight money market then it should sell the government securities to the public which will reduce the money supply in the economy. It is known as contractionary monetary policy.

Discount rate is defined as the interest rate on the discounted loan. If there is an increase in the discount rate then it will be more expensive for the banks to borrow from Fed and hence they borrow less. This will decrease the lending capacity of the banks which reduces the money supply in an economy.

Therefore, Sell government bonds and raise the discount rate are the best ways to contract the money supply.