If the Federal Reserve wants to increase the availability of money and credit, it can
A) lower the discount rate.
B) raise the reserve requirements.
C) sell government bonds to the public.
D) encourage banks to increase their prime lending rate.

Question

Quizplus · Accepted Answer

Lowering the discount rate would make it cheaper for banks to borrow from the Federal Reserve, which in turn would lead to an increase in the available money and credit. Raising reserve requirements would have the opposite effect, by requiring banks to hold more of their deposits in reserve and limiting their ability to lend. Selling government bonds to the public would not necessarily increase the availability of money and credit, as it would simply be a transfer of funds from buyers of the bonds to the government. Encouraging banks to increase their prime lending rate would also have the opposite effect, by making it more expensive for borrowers to access credit.

If the Federal Reserve Wants to Increase the Availability of Money