Question

Which of the following tools can the Fed use to contract the money supply? a. To expand the money supply? b. Increasing the discount rateselling short-term U.S. Treasury securities.c. Lowering the reserve requirement d. Buying short-term U.S. Treasury securities. e. Quantitative easing f. Decreasing the discount rate g. Raising the reserve requirement

Answer 1

Answer:

See below for details.

Explanation:

To contract the money supply the the Fed can increase the discount rate. This shall increase the cost of borrowing and thus the demand for money should go down. Furthermore, people have more incentive to save as they are getting an increased return thus the overall money supply contracts.

The Fed can also sell short term US securities, this reduces the amount of excess reserves available to banks and restricts their ability to make loans thus contracting the money supply.

The Fed can also raise the reserve requirement which reduces the banks ability to lend loans and create money thus contracting the supply again.

To expand the money supply, The Fed can lower the reserve requirements, creating excess reserves for banks that can be loaned out and thus expand money supply.

The Fed can also buy short term securities for money thus increasing the supply of money in the economy.

Quantitative easing simply increases the money supply with additional currency issuing so this expands the supply.

Decreasing the discount ratios discourage people from saving and encourages borrowing thus creating an expanded supply for money via credit creation.

Hope that helps.