Question

Which of the following events would be likely to increaseincrease the supply of​ money?

A. Banks perceive loans to be more risky and wish to hold more excess reserves.Banks perceive loans to be more risky and wish to hold more excess reserves.
B. The Fed increases reserve requirements for banks.The Fed increases reserve requirements for banks.
C. The Fed conducts an open market sale of bonds.The Fed conducts an open market sale of bonds.
D. The Fed decreases the discount rate relative to the federal funds rate.

Answer 1

Answer:

D. The Fed decreases the discount rate relative to the federal funds rate.

Explanation:

The discount rate is the interest rate charged by the Central bank when commercial banks borrows funds from it.

When the discount rate is lowered, excess reserves increase and money supply increases.

The reserve requirement is the amount of deposits of commercial banks that should be kept as reserves. The higher the reserve requirement, the lower the money supply.

If banks hold more excess reserves, money supply falls.

An open market sale decreases money supply while an open market purchase increase money supply.

I hope my answer helps you.