Which of the following is a tool used by the Federal Reserve to influence the economy?

• A. Adjust bank reserve requirements
• B. Pass federal tax legislation
• C. Set import tariffs
• D. Appoint regulatory boards

Answer: (A)

Monetary policy tools regulate the money supply and credit conditions in the economy. The Federal Reserve can adjust bank reserve requirements—the minimum fraction of deposits banks must hold in reserve. Lowering reserve requirements frees up more funds for banks to lend, which expands the money supply and tends to lower interest rates. Raising reserve requirements tightens banks’ lending, reducing the money supply and often pushing rates higher. These actions directly influence how easily households and businesses can borrow.

Other options involve fiscal policy or governance rather than monetary policy: tax legislation is handled by Congress and affects government revenue and spending; import tariffs are trade policy; appointing regulatory boards is about appointing leaders, not setting monetary conditions.