(PLZ HELP) How does the Federal Reserve reduce the money supply in the economy? Using monetary policy, the Federal Reserve incre
ases to reduce the money supply in the economy. Using (blank) monetary policy, the federal reserve increases (blank) to reduce the money supply in the economy. blank #1 options- contractionary ,expansionary ,flexible
The correct phrase is "<span>Using monetary policy, the Federal Reserve increases to reduce the money supply in the economy. Using (contractionary) monetary policy, the federal reserve increases (interest rates) to reduce the money supply in the economy. "
In order to achieve a contractionary policy (contracting, or shrinking, the money supply), the Federal Reserve will raise its primary interest rate, namely the overnight borrowing rate. This makes it more expensive for big banks to borrow money from the government for their daily operations, such as investing and loaning the money themselves, which in turn makes them less willing to do so in larger amounts. In this way, the increase in interest rates lowers the amount of money circulating from these big banks, and increases the amount sitting in the Federal Reserve, out of circulation, thus reducing the money supply. </span>
