Which tool of monetary policy allows the Federal Reserve to increase the money supply?
A. Increasing the discount rate on short-term loans
B. Selling treasury securities on the open market
C. Reducing the reserve requirement on banks
D. Raising interest on reserves paid to banks

C. Reducing the reserve requirement on banks

Explanation:

The Federal Reserve( Fed) expects commercial banks to maintain a percentage of customer deposits in their custody. The amount that the banks keep is known as reserves. The Fed sets the percentage of deposits to be held as reserves. The Fed may adjust this percentage in line with its monetary objectives.

By reducing the reserve requirements percentage, commercial banks remain with a bigger portion of deposits that they lend out. It means banks will issues out more loans to customers. An increase in lending adds more money to the economy. Reducing the reserve requirement increases the money supply in the country.

c is the correct answer.