Question

If the Fed wishes to decrease (tighten) the money supply, it should:

Group of answer choices

buy Treasury securities in the open market

lower the reserve requirements

raise the discount rate

Answer 1

If the Fed wishes to decrease the money supply, it will use contractionary monetary policy.

If it buys treasury securities in the open market, money supply will increase. If the Fed lowers the reserve requirements, banks will have more excess reserve and more money to lend. Therefore, money supply will increase.

If the Fed raises the discount rate, banks will have to pay more to borrow money from the Fed. Therefore, banks will borrow less and they will have less money to lend to other banks, Consumers, investors. Therefore, money supply in the economy will decrease.

Answer: raises the interest rate