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Principles of Macroeconomics (Mind...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305971509

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BuyFindarrow_forward

Principles of Macroeconomics (Mind...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305971509
Chapter 16.4, Problem 4QQ
Textbook Problem
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If the Fed wanted to use all of its policy tools to decrease the money supply, what would it do?

To determine
How fed decreases the money supply.

Explanation of Solution

The Federal Reserve is the central bank of the US economy and it is usually known as the Fed. The Fed has the responsibility of keeping the economy controlled from fluctuations, and it has to control the money supply of the economy through its monetary policies. The controlling of the money supply is one of the primary responsibilities of the Fed. The tools used by the Fed to control money supply include the following:

  1. 1. Selling of bonds: The purchase of government bonds from public generates new currency in the economy. Likewise, the sale of government bonds to the public retires the excess money from the economy, which helps to reduce the supply of money in the economy.
  2. 2. Increase the reserve requirements: The reserve requirement is the percentage of deposits that the banks have to keep, apart from lending...

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