ECONOMICS
FISCAL POLICY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Increase reserves to limit what banks can loan out
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Lower the interest rate
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Decrease reserves allowing banks to loan more
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Decrease government spending
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Detailed explanation-1: -When inflation is too high, the Federal Reserve typically raises interest rates to slow the economy and bring inflation down. When inflation is too low, the Federal Reserve typically lowers interest rates to stimulate the economy and move inflation higher.
Detailed explanation-2: -Conversely, if the Fed wants to decrease the money supply, it sells bonds from its account, thus taking in cash and removing money from the economic system.
Detailed explanation-3: -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-4: -When the Fed increases the reserve requirement then it means the Fed is using a contractionary monetary policy to regulate the economy. So, an increase in reserve requirement will make the banks lend less that in turn reduces the level of money supply in the economy.