An example of a tool used by the Fed that decreases the money supply is:

Question

Quizplus · Accepted Answer

An increase in the required reserve ratio means that banks must hold a higher percentage of their deposits as reserves, reducing the amount of money they can lend out and therefore decreasing the money supply.

C is also a correct answer as the Fed buying government bonds in the open market removes money from circulation and decreases the money supply. Nonetheless, B is a better choice because it directly affects the banking system and their ability to lend out money, while C relies on the willingness of the public to sell their bonds back to the Fed.

An Example of a Tool Used by the Fed That