If the Federal Reserve wants to increase the monetary base, it might:

Question

Quizplus · Accepted Answer

The Federal Reserve can increase the monetary base by engaging in an open market purchase of Treasury bills. This involves buying government securities from banks, which increases the banks' reserves, leading to an increase in the overall money supply. Increasing the discount rate (B) would have the opposite effect, because it would discourage banks from borrowing from the Fed and reduce the money supply. Increasing the reserve ratio (C) would also reduce the money supply, because it would require banks to hold more reserves and make fewer loans. Decreasing personal income taxes (D) would stimulate economic activity and increase spending, but it would not directly affect the monetary base.

If the Federal Reserve Wants to Increase the Monetary Base