Contrast the actions the central bank of a country would take to increase the quantity of money in an economy with the actions it would take to produce the opposite effect

Answer 1

A central bank that wants to increase the money supply in the economy can buy bonds in an open market operation, reduce the reserve requirement, lower the discount rate, or engage in quantitative easing. An open market purchase of bonds will encourage banks to make loans instead of holding its assets in the form of government bonds. As these loans are deposited into checking accounts, the money supply will expand because checking accounts are part of M1 . If banks are allowed to hold a smaller amount in reserves, then they will have a greater amount of money available to lend out. If the central bank lowers the discount rate that it charges to banks, banks will be willing to lend more aggressively, which will increase the money supply. The central bank can purchase bank debt, mortgage-backed securities, and Treasury notes as a part of quantitative easing to expand the quantity of money in the economy.
Conversely, a central bank that wants to reduce the money supply in the economy can sell bonds in an open market operation, raise the reserve requirement, raise the discount rate, or reverse its past practices of quantitative easing. An open market sale of government bonds will reduce the amount of loans given by banks, leading to a reduction in money supply. If banks are required to hold a greater amount in reserves, they will have less money available to lend out. If the central bank raises the discount rate, then banks will hold a higher level of reserves and reduce the amount of lending, thus reducing the money supply in the economy as a whole.