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

Question

BlackTom AI · Accepted Answer

Open-market sales of government bonds are contractionary, so the Reserve Bank would sell bonds to reduce the money supply.

1) Relevant knowledge points and concepts
- Central banks (like the RBA) use open-market operations to change the monetary base and influence the broader money supply.
- When a central bank sells bonds, private buyers pay with bank reserves (or cash), which reduces commercial banks’ reserves and the monetary base.
- The money multiplier amplifies changes in reserves into larger changes in the money supply: ΔM = (1/rr) × ΔR, where rr is the required reserve ratio and ΔR is the change in reserves.
- Selling bonds typically raises market interest rates (fewer reserves → tighter liquidity) and is a contractionary monetary policy.

2) Step-by-step reasoning
- The RBA sells government bonds to the public or banks.
- Buyers transfer funds to the RBA, which withdraws those funds from the banking system.
- Bank reserves fall by the sale amount; with fewer reserves, banks can make fewer loans.
- Fewer loans mean the deposit-expansion process is reduced, shrinking the money supply by the money-multiplier effect.

3) Calculation example (intermediate steps)
- Suppose the RBA sells $100 million in bonds and the required reserve ratio rr = 0.1 (10%).
- The immediate drop in reserves: ΔR = −$100 million.
- Using ΔM = (1/rr) × ΔR = (1/0.1) × (−$100m) = 10 × (−$100m) = −$1,000 million.
- Thus the money supply falls by $1 billion in this example.

4) Why the correct answer is correct
- Selling bonds withdraws liquidity and reserves from banks, directly reducing the monetary base and, through the multiplier, the overall money supply. This is the standard contractionary tool.

5) Why other options are incorrect
- a. Buy bonds: this injects reserves and increases the money supply (expansionary).
- c. Set fire to cash: unrealistic and not a policy instrument; central banks operate through institutions and markets.
- d. Do nothing: passive and unlikely to reliably reduce the money supply.

Conclusion: The correct policy to decrease the money supply is to sell bonds — 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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