Monetary policy can influence the money supply. Which of the following actions corresponds to this mechanism in the material?

• A. Change money supply
• B. Raise tariffs
• C. Sell corporate bonds
• D. Set exchange rates

Answer: (A)

Monetary policy changes the money supply by altering the quantity of reserves in the banking system. Central banks do this directly through tools like open market operations (buying or selling government securities), adjusting reserve requirements, and changing policy rates, which respectively increase or decrease liquidity and total money in circulation.

The action that matches this mechanism is directly changing the money supply itself, since that is the core way monetary policy influences liquidity. Raising tariffs, selling corporate bonds, or setting exchange rates operate in areas outside the direct control of the money stock: tariffs affect trade, selling corporate bonds influences asset markets rather than the aggregate money supply, and exchange-rate actions pertain to currency policy rather than the central bank’s control of money creation.