If the Fed wanted to use all three of its major monetary control tools to decrease the money supply, it would:
A) buy bonds, reduce the discount rate, and reduce reserve requirements.
B) sell bonds, reduce the discount rate, and reduce reserve requirements.
C) sell bonds, increase the discount rate, and increase reserve requirements.
D) buy bonds, increase the discount rate, and increase reserve requirements.

Question

Quizplus · Accepted Answer

To decrease the money supply, the Fed would want to conduct contractionary monetary policy. Selling bonds would decrease the amount of money in circulation since people would use their cash to buy the bonds. Increasing the discount rate would discourage banks from borrowing from the Fed and instead encourage them to keep more money in reserves, further decreasing the amount of money available for lending. Increasing reserve requirements would also force banks to keep more money in reserves and decrease the amount they could lend out. Therefore, option C is the best choice as it includes all three contractionary tools.

If the Fed Wanted to Use All Three of Its