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Of the three money supply tools, which one is seldom changed in practice?
AThe buying of government bonds in the open market
BThe selling of government bonds in the open market
CThe rate charged when a bank borrows from the centre
DThe share of deposits a bank is required to hold
Answer & Solution
Correct answer: D. The share of deposits a bank is required to hold
1. Lowering the reserve requirement increases loanable funds, causes banks to lower interest rates and stimulates the economy.
2. Even so, a central bank seldom changes reserve requirements.
3. Open market operations are the tool used most frequently, because bonds can be bought and sold continuously.
4. The discount rate is also adjusted regularly to slow or stimulate growth, so neither of those is the rarely used tool.
_Source: OpenStax Introduction to Business (CC BY 4.0), Ch 15 "Understanding Money and Financial Institutions", section 15.2 The Federal Reserve System_
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