Question

Contrast the actions a central bank would take to increase the quantity of money in the economy with the actions it would take to produce the opposite affect.

Answer 1

Answer:

• Actions to increase the quantity of money in the economy: rescue bonds from the market, lower the interbank interest rate, lower the legal reserves requiered to banks, increase monetary base.

• Actions to decrease the quantity of money in the economy: put bonds on the market, increase the interbank interest rate, increase the legal reserves requiered to banks, decrease monetary base.

Explanation:

• To increase the quantity of money  in the economy, Central Bank can  rescue bonds from the market (which means getting the bonds back, and deliver money to the former holders), lower the interbank interest rate (wich makes more attractive to banks to borrow money from central bank and  would yield in more lending from banks to private sector) ,  or lower the legal reserves requiered to banks (which means that banks can lend a bigger amount of the deposits they receive, increasing the supply of money in the market). central bank can also increase the monetary base (the amount of paper money in the economy).
• To decrease the amount of monet in the economy means do the opposite that was explained in the above paragraph.