If the Federal Reserve wanted to implement an expansionary monetary policy, which one of the following actions would the Federal Reserve take?
- Raise the reserve requirement and the discount rate.
- Purchase additional U.S. government securities and lower the discount rate.
- Raise the discount rate and sell U.S. government securities.
- Lower the discount rate and raise the reserve requirement.
Answer(s): B
Explanation:
Choice "b" is correct. Fed purchases of government securities increase the money supply (putting money into circulation), and lowering the discount rate encourages borrowing by member banks and increases the money supply. Hence, these measures would help implement an expansionary monetary policy.
Choice "a" is incorrect. Raising the reserve requirement and the discount rate would have the opposite effect of decreasing the money supply.
Choice "c" is incorrect. Raising the discount rate and selling government securities would reduce the money supply.
Choice "d" is incorrect. Raising the reserve requirement would decrease the money supply, but lowering the discount rate would increase the money supply.