ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Which of the following describes what the Fed would do to pursue an expansionary monetary policy? a DECREASE in the money supply, an INCREASE in interest rates, and a DECREASE in GDP.

Detailed explanation-2: -Expansionary monetary policy is when a central bank uses its tools to stimulate the economy. That increases the money supply, lowers interest rates, and increases demand.

Detailed explanation-3: -If the Fed wants to implement expansionary monetary policy, it might: buy government securities to reduce the federal funds rate. When the Fed purchases bonds, the Fed: increases the reserves and the federal funds rate decreases.

Detailed explanation-4: -Answer and Explanation: The correct options are (a) A decrease in the reserve ratio and (b) FOMC directive to purchase securities. A decrease in the reserve ratio means that commercial banks have to keep lesser money as a reserve with the central bank. This means that they can lend more.