Question

The money supply increases when the Fed a. lowers the discount rate. The increase will be larger the larger the reserve ratio is. b. raises the discount rate. The increase will be larger the smaller the reserve ratio is. c. raises the discount rate. The increase will be larger the larger the reserve ratio is. d. lowers the discount rate. The increase will be larger the smaller the reserve ratio is.

Answer 1

Answer: d. lowers the discount rate. The increase will be larger the smaller the reserve ratio is

Explanation: The money supply is given as the total amount of money (bills, coins, loans, credit, and other liquid instruments) in a particular economy (in circulation or in existence).

The Fed has a number of tools for managing the money supply which include: changing the discount rate, changing the reserve requirement, conducting open market operations and redeeming Federal Reserve notes.

Using the discount rate, which is the interest rate the Federal Reserve charges on loans from the Federal Reserve, to increase money supply, the Fed lowers the discount rate which basically increases excess reserves in commercial banks across the economy thus increasing the money supply. The increase in the money supply will be significantly larger the smaller the reserve ratio is.