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

Question

Quizplus · Accepted Answer

Lowering the interest rate paid on bank reserves and increasing the required reserve ratio both make it more expensive for banks to hold reserves with the Fed, which in turn reduces the amount of money they have available to lend out, decreasing the supply of money.

Option B would be ambiguous because while an open market purchase of government securities typically increases the money supply, raising the discount rate makes loans from the Fed more expensive for banks, which can reduce their willingness to lend, potentially decreasing the money supply.

Option C would be ambiguous because while paying a higher interest rate on bank reserves encourages banks to hold more reserves, which could decrease the money supply, conducting an open market purchase of government securities typically increases the money supply, potentially offsetting the effect of the higher interest rate.

Which of the Following Combinations Would Unambiguously Decrease the Supply