ECONOMICS
FEDERAL RESERVE
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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increase bank reserves by raising the discount rate.
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increase bank reserves by buying government securities.
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decrease bank reserves by raising the discount rate.
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decrease bank reserves by selling government securities.
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Detailed explanation-1: -Since the aggregate demand is low during the recessionary period, the central bank will pursue expansionary monetary policies and therefore would increase the money supply. While buying the government securities in the open market, the Fed releases money in the economy and thereby increases the money supply.
Detailed explanation-2: -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-3: -If the Fed buys bonds in the open market, it increases the money supply in the economy by swapping out bonds in exchange for cash to the general public. Conversely, if the Fed sells bonds, it decreases the money supply by removing cash from the economy in exchange for bonds.
Detailed explanation-4: -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-5: -The Fed uses open market operations to buy or sell securities to banks. When the Fed buys securities, they give banks more money to hold as reserves on their balance sheet. When the Fed sells securities, they take money from banks and reduce the money supply.