SIE Exam Question 371: Answer and Explanation

Question: 371

The money supply will tighten based on which of these techniques of monetary policy?

• A. The Federal Reserve reduces the reserve requirement
• B. The Federal Reserve purchases government securities from primary dealers
• C. The U.S. Government decreases government spending
• D. The Federal Reserve increases the discount rate

Correct Answer: D

Explanation:

D - Under monetary policy, an increase to either the reserve requirement or the discount rate will deter lending, which will result in a tightening of the money supply. A decrease in spending by the U.S. government will also reduce the amount of money, but government spending is a tool of fiscal policy. When the Fed purchases securities in the open market more money goes into circulation, so this would ease the money supply.