If the Federal Reserve wanted to implement an expansionary monetary policy, which one of the following actions would the Federal Reserve take?
Answer(s): B
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.
To decrease the money supply, the Fed might:
Answer(s): A
Choice "a" is correct. To decrease the money supply, the Fed can: (1) sell government securities in the open market, (2) increase the discount rate, and (3) increase the required reserve ratio.Choice "b" is incorrect. The Fed should sell (not buy) securities on the open market. Choice "c" is incorrect. The Fed should increase (not decrease) the required reserve ratio. Choice "d" is incorrect. The Fed should increase (not decrease) the discount rate.
Which of the following correctly lists the three ways to increase the money supply?
Answer(s): D
Choice "d" is correct. The three ways the Fed can increase the money supply are: (1) buy (purchase) government securities in the open market, (2) lower the discount rate, and (3) lower the required reserve ratio. Choice "a" is incorrect, per Explanation above.Choice "b" is incorrect, per Explanation above. Choice "c" is incorrect, per Explanation above.
An increase in the money supply leads to:
Choice "a" is correct. Expansionary monetary policy results when the Fed increases the money supply. Expansionary monetary policy affects the economy through the following chain of events: (1) an increase in the money supply causes interest rates to fall, (2) falling interest rates stimulate the desired levels of firm investment and household consumption, (3) increases in desired investment and consumption cause an increase in aggregate demand, and (4) aggregate demand shifts to the right causing real GDP and the price level to rise.Choice "b" is incorrect. An increase in the money supply causes investment to increase, not decrease. Choice "c" is incorrect. An increase in the money supply causes interest rates to decrease, not increase, investment to increase, not decrease and aggregate demand to increase, not decrease.Choice "d" is incorrect per Explanation above.
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