Question

To prevent banks from using excess reserves to make loans that would increase the money supply, the Federal Reserve could conduct open-market ______ and _____ the interest rate paid on bank reserves. a) sales; lower b) purchases; raise c) sales; raise d) purchases; lower

Answer 1

Answer:

C) Sales; raise

Explanation:

To prevent banks from using excess reserves to make loans that would increase the money supply, the Federal Reserve could conduct open-market SALES and RAISE the interest rate paid on bank reserves.

Open market operations can be used to control money supply.

Government securities are bought and sold in the open market to either increase or decrease money supply.

If the government wants to reduce money supply, it sells government bonds to the public. Money is collected in return for sale of security thereby reducing money supply.

In contrast, if government wants to increase money supply, it buys securities and more money is available in the economy.

The government can also influence the money supply by modifying reserve requirements.

Reserve requirement is the amount of funds banks must hold against deposits in bank accounts.

If reserve requirement is low, banks can loan out more money thereby increasing money supply.

In contrast, If reserve requirement is high, banks have less fund to loan out thereby decreasing money supply.

Answer 2

Answer:

The answer is C) Sales & Raise

Explanation: