ECONOMICS
FEDERAL RESERVE
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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An increase in the required reserve ratio.
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An increase in the discount rate.
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Purchases of bonds in open market operations.
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Higher taxes on interest income.
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Detailed explanation-1: -Similarly, when the central bank wants to increase the money supply in the market, it will purchase securities from the market. This step is taken to reduce the rate of interest and also to help in the economic growth of the country. This policy is known as the expansionary monetary policy.
Detailed explanation-2: -Open market operations (“OMOs”) are the central bank’s primary tool of monetary policy. If the central bank wants interest rates to be lower, it buys bonds. Buying bonds injects money into the money market, increasing the money supply.
Detailed explanation-3: -If the Fed wants to increase the money supply, it will buy bonds, increasing the reserves of the banks that sell them. The money supply would increase because these banks would then have more money to lend.
Detailed explanation-4: -Conducting monetary policy If the Fed, for example, buys or borrows Treasury bills from commercial banks, the central bank will add cash to the accounts, called reserves, that banks are required keep with it. That expands the money supply.
Detailed explanation-5: -It is an activity to either increase or decreases liquidity in the banking system and influence the short-term interest rates. When the Fed makes an open market purchase, it expands the amount of money in circulation and the reserves in banks.