ECONOMICS
FISCAL POLICY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Congress passes a rule to reduce personal income taxes.
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The Federal Reserve buys treasury bonds on the open market.
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Congress passes a bill to reduce regulations on monopolies.
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The Federal government borrows money from a foreign bank to cover a budget deficit.
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Detailed explanation-1: -Quantitative easing (QE) is a form of unconventional monetary policy in which a central bank purchases longer-term government securities or other types of securities from the open market in order to increase the money supply and encourage lending and investment.
Detailed explanation-2: -This so-called quantitative easing increases the size of the central bank’s balance sheet and injects new cash into the economy. Banks get additional reserves (the deposits they maintain at the central bank) and the money supply grows.
Detailed explanation-3: -By buying or selling bonds, bills, and other financial instruments in the open market, a central bank can expand or contract the amount of reserves in the banking system and can ultimately influence the country’s money supply.
Detailed explanation-4: -d. The Fed buys bonds, which increases the supply of federal funds, which lowers the interest rate, and leads to a decrease in intended investment spending and aggregate demand and output.
Detailed explanation-5: -Explanation: When the Fed purchases securities in the open market, the Fed increases the reserve deposits of its member banks/institutions. In turn, banks have to manage the proportion of their reserves to their checking account deposit liabilities (i.e., checking account deposits have increased).