There are several ways that governments can increase or decrease the money supply. Match the descriptions below with the corresponding policy tool. It is possible that a description does not apply to any of the terms. 1. Open Market Operations
2. Reserve Requirement
3. Discount Rate
4. Quantitative Easing
A. A government printing more currency.

B. An increase in government spending.

C. An increase in the interest rate that a central bank charges commercial banks for loans.

D. A central bank purchasing existing bonds.

E. An increase in the percentage of deposits that banks must keep on hand.

F. A central bank purchasing a large quantity of longer-term Treasury bonds.

1. Open Market Operations -  A central bank purchasing existing bonds.

When the central bank purchases existing bonds, this is an expansionary monetary policy because by buying bonds they are putting money back into people's hands by paying them for the bonds.

2. Reserve Requirement  - An increase in the percentage of deposits that banks must keep on hand.

When the Central bank increases the reserve requirement, it means that banks should keep a larger percentage of deposits kept with them. This is a contractionary Monetary Policy because the banks will have less money to loan out to the public.

3. Discount Rate  - An increase in the interest rate that a central bank charges commercial banks for loans.

The Central bank loans money to commercial banks using the discount rate. Should they increase this rate, banks would find it more expensive to borrow from them and reduce borrowing. This means that they would then not have a lot of money to loan out making this a contractionary monetary policy.

4. Quantitative Easing  - A central bank purchasing a large quantity of longer-term Treasury bonds.

Quantitative Easing refers to the Government buying a large quantity of longer-term treasury bonds to increase money supply so that rates would fall and people can borrow more money to boost the economy. This policy is not usually done and indeed is considered unconventional.

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