Which of the following events would cause the supply of money to increase?

• A. The central bank raises the reserve requirement for commercial banks.
• B. Commercial banks increase their lending rates.
• C. The government increases income taxes.
• D. The central bank purchases government securities in the open market.

Answer: (D)

Verified step by step guidance

1. Understand that the supply of money in an economy is primarily controlled by the central bank through monetary policy tools such as reserve requirements, open market operations, and interest rates.
2. Analyze the effect of raising the reserve requirement: When the central bank raises the reserve requirement, commercial banks must hold a larger fraction of deposits as reserves, which reduces the amount they can lend out, thereby decreasing the money supply.
3. Consider the impact of commercial banks increasing their lending rates: Higher lending rates make borrowing more expensive, which tends to reduce borrowing and thus decrease the money supply.
4. Evaluate the effect of the government increasing income taxes: Higher taxes reduce disposable income and consumption, but this is a fiscal policy action and does not directly increase the money supply controlled by the central bank.
5. Recognize that when the central bank purchases government securities in the open market, it pays commercial banks, increasing their reserves and enabling them to lend more, which increases the money supply.