If the central bank wishes to contract the money supply, it could do any of the following: sell government bonds, raise the reserve requirement, and raise the refinancing rate.

Question

Quizplus · Accepted Answer

Selling government bonds reduces the amount of money in circulation, raising the reserve requirement means banks have to hold onto more of their deposits, reducing the amount they can lend out, and raising the refinancing rate makes it more expensive for banks to borrow money from the central bank, which reduces their ability and willingness to lend.

If the Central Bank Wishes to Contract the Money Supply