If the Reserve Bank of Australia wishes to decrease the money supply, it should

Question

BlackTom AI · Accepted Answer

Open-market operations: selling government bonds is a standard contractionary monetary policy that reduces the money supply.

1) Relevant knowledge points and concepts
- Central banks (like the Reserve Bank of Australia) use open-market operations as a primary tool to change the money supply. 
- Selling government bonds drains reserves from the banking system; buying bonds injects reserves. 
- Money supply ≈ monetary base × money multiplier. Reducing bank reserves lowers the monetary base and, via the multiplier, the overall money supply.
- Selling bonds also tends to raise interest rates (bond prices fall), which further reduces borrowing and spending.

2) Step-by-step reasoning
Step 1: The RBA offers (sells) government bonds to commercial banks or the public.  
Step 2: Buyers pay for those bonds with bank deposits or reserves. If banks buy, they pay using reserves held at the RBA; if the public buys, they withdraw deposits and banks send reserves to the RBA.  
Step 3: The RBA’s bond sale collects those payments and removes the corresponding reserves from the banking system, reducing banks’ reserve balances.  
Step 4: With fewer reserves, banks have less capacity to create loans (via the deposit–loan process), so the money multiplier effect is smaller and the total money supply falls.  
Step 5: Bond prices decline and yields rise, putting upward pressure on interest rates, which dampens borrowing and spending, reinforcing the decrease in money supply.

3) Calculations
(No numerical values given; logic is shown above. Formally: Money Supply = Monetary Base × Money Multiplier. Selling bonds reduces the Monetary Base → Money Supply decreases.)

4) Why the correct answer is correct
Selling bonds directly withdraws liquidity from banks and the public, lowering reserves and shrinking the money supply—this is the textbook contractionary open-market operation.

5) Why other options are incorrect
a. Setting fire to cash is not a feasible or policy tool and would be illegal and negligible compared to deposit-based money creation.  
c. Doing nothing and hoping for theft is not a monetary policy and is impractical.  
d. Buying bonds would add reserves to the system and increase the money supply (expansionary), the opposite of the goal.

Conclusion: Therefore the correct choice is b. sell bonds. This matches the provided answer: b. sell bonds.

If the Reserve Bank of Australia wishes to decrease the money supply, it should单项选择题

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If the Reserve Bank of Australia wishes to decrease the money supply, it should

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