Question:
Which of the following will lead to a decrease in an economy’s money supply?
(1) A decrease in income tax rates
(2) A decrease in the discount rate
(3) An open market purchase of government securities by the Central Bank
(4) An increase in statutory reserve requirements
(5) An increase in government expenditure
Correct Answer:
(4)
Answer Explanation:
The Statutory Reserve Requirement (SRR) dictates the percentage of deposits banks must keep locked as cash rather than lending out. If the Central Bank increases the SRR, commercial banks have less money available to lend, which shrinks the credit creation multiplier and directly decreases the money supply.
Topic: Monetary Policy Year: 2019
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