Question

How does the Federal Reserve reduce the money supply in the economy? Using monetary policy, the Federal Reserve increases to reduce the money supply in the economy.

Answer 1

By spending it on social security.

Answer 2

The correct answer is: "Using monetary policy, the Federal Reserve increases the interest rate to reduce the money supply in the economy".

The interest rate is the price charged by financial institutions for borrowed funds. If such price increases, the amount of borrowed funds that investors are willing to demand decreases (inverse relationship of price and quantity demanded). Therefore, such adverse conditions, restrict the amount of money in circulation in the economy, the so-called money supply.