Both in present times and in the past, the Fed has used three tools to influence the money supply. Sort the below Fed actions into the following:
1. increase the money supply (Increase),
2. decrease the money supply (Decrease),
3. or not a tool available to the Fed (Not a tool).
a. The Fed raises the interest rate charged on loans to banks
b. The Fed authorizes a one time tax rebate of $1,000
c. The Fed reduces the ratio of deposits banks must hold on reserve
d. The Fed sells $200 million in mortgage-backed securities.
e. The Fed buys $100 million in short-term Treasury securities
f. The Fed sells $300 million in long-term Treasury securities.
Categories Increase Decrease Not a tool

Increase money supply ⇒ Fed buys securities with dollars thereby pumping money into the system. Fed can also reduce deposit ratios to be held in reserve thereby increasing money banks can lend out.

Decrease money supply ⇒ Fed raises interest rate on loans it charges to banks so that they borrow less thereby reducing money supply. They can also sell securities so people buy with dollars and reduce the money in the financial system.

Increase the money supply

c. The Fed reduces the ratio of deposits banks must hold on reserve  

e. The Fed buys $100 million in short-term Treasury securities

Decrease the money supply

a. The Fed raises the interest rate charged on loans to banks  

d. The Fed sells $200 million in mortgage-backed securities.  

f. The Fed sells $300 million in long-term Treasury securities.

Not a tool available to the Fed

b. The Fed authorizes a one time tax rebate of $1,000.

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