Using table 6.3, it is decided that a decrease in the money supply is the correc

Question

Using table 6.3, it is decided that a decrease in the money supply is the correct policy, given the current economic situation. Which list of monetary policy actions would be appropriate?

Select one:

A. Open-market sale, higher discount rate, higher required reserve ratio

B. Open-market sale, lower discount rate, lower required reserve ratio

C. Open-market purchase, lower discount rate, lower required reserve ratio

D. Open-market purchase, higher discount rate, higher required reserve ratio

Cash held by the public: Discount rate: Total reserves: Unemployment rate: Required reserve ratio: Rate of inflation: Transactions deposits: $400 million 5% $1,000 million 7.6% 20% 1.1% $5,000 million

Explanation / Answer

Option a. Open-market sale, higher discount rate, higher required reserve ratio would decrease monetary supply.

Through Open market Operation sale Central banks sell securities and suck the liquidity and cash out of the banking system. Higher discount rates means loans rates are higher and cost of funding is higher hence liquidity will be less. Higher reserve ratio forces banks to park excess fund was with central banks and reduce liquidity.

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