If the Fed wanted to expand the money supply as part of an antirecession strategy, it could
A) increase the reserve requirements imposed on commercial banks.
B) decrease the interest rate paid on excess reserves encouraging banks to extend more loans.
C) sell U.S. government securities and other financial assets that it is currently holding.
D) raise the interest rate on loans extended to banks and other financial institutions.

Question

Quizplus · Accepted Answer

Decreasing the interest rate paid on excess reserves would encourage banks to extend more loans, which would increase the money supply. Option A would actually reduce the money supply by requiring banks to hold more reserves. Option C would also reduce the money supply by taking money out of circulation. Option D would make it more expensive for banks to borrow, which could lead to them extending fewer loans, again reducing the money supply.

If the Fed Wanted to Expand the Money Supply as Part