ECONOMICS
MONETARY POLICY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Increase the money supply in order to lower interest rates
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increase the money supply in order to raise interest rates
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decrease the money supply in order to lower interest rates
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decrease the money supply in order to raise interest rates
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Detailed explanation-1: -In any case, that’s the theory. To counter a recession, the Fed uses expansionary policy to increase the money supply and reduce interest rates. With lower interest rates, it’s cheaper to borrow money, and banks are more willing to lend it.
Detailed explanation-2: -The Fed can lower interest rates by buying debt securities on the open market in return for newly created bank credit. Flush with new reserves, the banks that the Fed buys from are able to lend money to each other at a lower fed funds rate, the rate that banks lend to each other overnight.
Detailed explanation-3: -Today, the Fed uses its tools to control the supply of money to help stabilize the economy. When the economy is slumping, the Fed increases the supply of money to spur growth. Conversely, when inflation is threatening, the Fed reduces the risk by shrinking the supply.
Detailed explanation-4: -But remember, the Fed cuts interest rates to increase the amount of money available in the economy and spur economic growth.
Detailed explanation-5: -The Fed can increase the money supply by lowering the reserve requirements for banks, which allows them to lend more money. Conversely, by raising the banks’ reserve requirements, the Fed can decrease the size of the money supply.