ECONOMICS
FEDERAL RESERVE
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Use monetary policy to increase the money supply.
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Use monetary policy to increase taxes and decrease government spending.
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Use monetary policy to decrease the money supply.
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Use monetary policy to decrease taxes and increase government spending.
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Detailed explanation-1: -A central bank, such as the Federal Reserve in the U.S., will use expansionary monetary policy to strengthen an economy. The three key actions by the Fed to expand the economy include a decreased discount rate, buying government securities, and a lowered reserve ratio.
Detailed explanation-2: -The primary tool the Federal Reserve uses to conduct monetary policy is the federal funds rate-the rate that banks pay for overnight borrowing in the federal funds market.
Detailed explanation-3: -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.
Detailed explanation-4: -Traditionally, the Fed’s most frequently used monetary policy tool was open market operations. This consisted of buying and selling U.S. government securities on the open market, with the aim of aligning the federal funds rate with a publicly announced target set by the FOMC.