ECONOMICS
FEDERAL RESERVE
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Increase the supply of money in the economy
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Decrease the supply of the money in the economy
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Either A or B
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None of the above
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Detailed explanation-1: -The Fed has several monetary policy tools it can use to fight off a recession. It can lower interest rates to spark demand and increase the amount of money in circulation via open market operations (OMO), including quantitative easing (QE), through which additional types of assets may be purchased by the Fed.
Detailed explanation-2: -One approach has been to purchase large quantities of financial instruments from the market. This so-called quantitative easing increases the size of the central bank’s balance sheet and injects new cash into the economy.
Detailed explanation-3: -Monetary policy attempts to increase aggregate demand during recession by increasing the growth of the money supply. The theory of liquidity preference suggests that increasing the money supply will cause interest rates to fall. Lower interest rates cause higher investment spending which increases aggregate demand.
Detailed explanation-4: -The Fed can increase the money supply by lowering the reserve requirements for banks, which allows them to lend more money. Conversely, by raising the banks’ reserve requirements, the Fed can decrease the size of the money supply.