Final answer:
The Federal Reserve reduces the money supply in the economy by carrying out open market sales and/or increasing the interest rate paid on reserves.
Explanation:
To reduce the money supply in the economy, the Fed would:
- carry out open market sales and/or increase the interest rate paid on reserves.
The Federal Reserve (the Fed) implements monetary policy through various tools such as open market operations (OMO) and adjustments in interest rates. When the Fed carries out open market sales, it reduces the money supply by selling securities, thereby increasing interest rates as banks have less money to lend.
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