Multiple Choice
Which group is responsible for the policy decision of changing the money supply in the United States?
18. The Monetary System
The Federal Reserve and the Money Supply
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To stimulate the economy, the Federal Reserve can:
A
Increase the discount rate
B
Sell government securities in the open market
C
Raise interest rates
D
Lower the reserve requirement
Verified step by step guidance1
Understand the role of the Federal Reserve in monetary policy, which involves influencing the money supply and interest rates to stabilize the economy.
Recognize that to stimulate the economy, the Fed aims to increase the money supply and encourage borrowing and spending.
Analyze each option: Increasing the discount rate, selling government securities, and raising interest rates all tend to reduce the money supply or make borrowing more expensive, which contracts economic activity rather than stimulates it.
Recall that lowering the reserve requirement means banks can hold less money in reserve and lend out more, increasing the money supply and stimulating economic activity.
Conclude that among the options, lowering the reserve requirement is the correct action the Fed would take to stimulate the economy.
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