The major tools that the Fed uses to control the money supply include:
A) controlling the amount of government spending.
B) discount rate lending.
C) open market operations.
D) discount rate lending and open market operations.

Question

Quizplus · Accepted Answer

The Fed primarily uses two tools to control the money supply: discount rate lending and open market operations.

Discount rate lending refers to the interest rate at which commercial banks can borrow money from the Fed. By increasing or decreasing the discount rate, the Fed can encourage or discourage borrowing by banks, thereby affecting the amount of money circulating in the economy.

Open market operations involve the buying and selling of government securities by the Fed. When the Fed buys securities, it injects money into the economy, thereby increasing the money supply. When it sells securities, it reduces the money supply.

While controlling government spending is important for overall economic stability, it is not a direct tool that the Fed uses to control the money supply.

The Major Tools That the Fed Uses to Control the Money