Which of the following combinations would unambiguously increase the supply of money?

Question

Quizplus · Accepted Answer

Paying a higher interest rate on bank reserves would encourage banks to keep more reserves, which would decrease the money supply. However, conducting an open market purchase of government securities would inject more money into the economy, increasing the money supply. Thus, option C would unambiguously increase the supply of money by offsetting the conflicting effects of the two policies. Option A would have conflicting effects as the increase in interest rate on reserves would decrease money supply while increasing the required reserve ratio would increase money supply. Option B would also have conflicting effects, as the open market purchase would increase money supply while raising the discount rate would reduce money supply.

Which of the Following Combinations Would Unambiguously Increase the Supply