If the Federal Reserve wishes to increase the money supply it should decrease the discount rate and/or decrease the required reserve ratio and/or buy government securities on the open market.

Question

Quizplus · Accepted Answer

These are all methods that the Federal Reserve can use to increase the money supply. Decreasing the discount rate makes it easier and cheaper for banks to borrow money from the Fed, which in turn can lead to increased lending and more money in circulation. Decreasing the required reserve ratio allows banks to hold less money in reserve and lend out more, further increasing the money supply. Finally, buying government securities on the open market puts more money into circulation and can lead to lower interest rates, encouraging more borrowing and spending.

If the Federal Reserve Wishes to Increase the Money Supply