ECONOMICS
FISCAL POLICY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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The economy is expanding too quickly and inflation is a concern.
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The federal government passes a new budget with a large deficit.
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The economy is prosperous with low inflation.
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A recession has reduced aggregate demand and increased unemployment.
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Detailed explanation-1: -The U.S. Federal Reserve employs expansionary policies whenever it lowers the benchmark federal funds rate or discount rate, decreases required reserves for banks or buys Treasury bonds on the open market.
Detailed explanation-2: -To counteract an economic downturn, the Fed stimulates demand by increasing the money supply. It does this by changing the fed funds rate, discount rate, reserve requirement, and engaging in open market operations.
Detailed explanation-3: -The correct answer is a. When the Fed wants to increase the money supply, it implements an expansionary monetary policy. This type of policy includes the decrease of the discount rate, the purchase of government securities, and the reduction of the reserve requirement ratio.
Detailed explanation-4: -Effects of an Expansionary Monetary Policy An expansionary monetary policy reduces the cost of borrowing. Therefore, consumers tend to spend more while businesses are encouraged to make larger capital investments.