This text appears on the economics page of the local newspaper. One of the sentences is incorrect. Which corrected sentence would make the passage accurate?

A) Prices are rising as investments and lending increase.

B) Prices are stabilizing as investments increase and lending decreases.

C) Expand the money supply by halting the sale of government securities

D) Expand the money supply by lowering discount rates and reserve requirements.

D) Expand the money supply by lowering discount rates and reserve requirements.

Explanation:

By lowering discount rates, the Fed pushes the costs of borrowing money lower. The discount rate is the rate that the Fed applies when it lends money to banks. It has similar effects on interest rates as the fed funds rate. Lowering the discount rate will discourage banks from holding excess reserves. They will want to lend out to households and businesses to earn interests. As they loan out, they are increasing the money supply in the economy.

The Fed instructs banks to maintain a certain percentage of deposits as reserves. Banks cannot loan out the reverse amount. Should the fed lower reserve requirements, banks will have a higher proposition of deposits to loan out. The availability of more credit increases the money supply in the economy.