Future Business Leader Achievments (FBLA) Economics Practice Exam

What can change the money supply?

1. The government borrowing money

2. Changes in consumer confidence

3. Central bank actions

4. Interest rates set by local governments

The correct answer is: Central bank actions

The correct answer focuses on the role of central banks in managing the money supply, which is a crucial function of monetary policy. Central banks, such as the Federal Reserve in the United States, have various tools to influence the amount of money circulating in the economy. They can adjust reserve requirements for banks, conduct open market operations by buying or selling government securities, and set interest rates through the discount rate. By manipulating these factors, central banks can either increase or decrease the money supply to achieve economic stability and growth, control inflation, and manage employment levels. In contrast, while government borrowing can temporarily affect the economy's liquidity and potentially lead to some changes in the money supply, it is not a direct tool for managing the overall money supply like central bank actions. Similarly, changes in consumer confidence can influence the velocity of money or spending patterns, but they do not directly alter the money supply itself. Local governments setting interest rates typically do not have the same broad impact on the economy or the national money supply as central banks do, as their authority is limited to local or municipal jurisdiction, and they lack the comprehensive monetary policy tools of a central bank.