Which of the following government actions will result in a decrease in the supply of money in the economy?

• A. Reducing the income tax rate
• B. Purchasing government securities in the open market
• C. Lowering the discount rate
• D. Increasing the required reserve ratio for banks

Answer: (D)

Verified step by step guidance

1. Understand that the supply of money in the economy is influenced by the central bank's monetary policy tools, which include open market operations, the discount rate, and reserve requirements for banks.
2. Analyze how each action affects the money supply: Reducing the income tax rate affects disposable income but does not directly change the money supply controlled by the central bank.
3. Purchasing government securities in the open market injects money into the banking system, increasing the money supply, so this action does not decrease it.
4. Lowering the discount rate makes it cheaper for banks to borrow from the central bank, encouraging more lending and increasing the money supply, so this also does not decrease it.
5. Increasing the required reserve ratio means banks must hold a larger fraction of deposits as reserves, reducing the amount they can lend out, which directly decreases the money supply.