Question

If the Federal Reserve wants to increase the amount of money available to member banks to ease a tight money market, it could:

Selections

• A. Raise the discount rate to its member banks

• B. Lower the minimum reserves required by its member banks

• C. Raise the minimum reserves required by its member banks

• D. Sell government bonds 

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Answer: B

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5 Keys Summary

• To ease a tight money market (when demand for money is high and supply is low), the Federal Reserve must employ expansionary monetary policy to stimulate economic growth.

• The correct expansionary action available to the Federal Reserve (the Fed) is to lower the minimum reserves required by its member banks.

• Reserve requirements are the amounts of cash or credit deposits banks must set aside; reducing these requirements allows banks to lend out a significantly higher percentage of their deposited funds.

• This action increases the total supply of funds in the banking system, making more money available for loans to consumers and businesses.

• Actions like raising the discount rate, raising minimum reserves, or selling government securities are all considered contractionary policies intended to slow down the economy and decrease the money supply.

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