Which of the following actions would a central bank most likely take to decrease the money supply?

• A. Purchase government securities in the open market
• B. Decrease the discount rate
• C. Sell government securities in the open market
• D. Lower the reserve requirement for banks

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the tools a central bank uses to influence the money supply. These include open market operations (buying or selling government securities), changing the discount rate, and adjusting the reserve requirement for banks.
2. Step 2: Recall that when a central bank wants to decrease the money supply, it aims to reduce the amount of money circulating in the economy.
3. Step 3: Analyze the effect of selling government securities in the open market. When the central bank sells securities, it receives money from banks or the public, which reduces the reserves banks have available to lend, thus decreasing the money supply.
4. Step 4: Contrast this with buying government securities, which injects money into the banking system and increases the money supply, so it is not the correct action to decrease money supply.
5. Step 5: Consider the other options: decreasing the discount rate encourages borrowing and increases money supply, and lowering the reserve requirement allows banks to lend more, also increasing money supply. Therefore, selling government securities is the action that decreases the money supply.