ECONOMICS
MONETARY POLICY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Buy treasury bonds on the open market.
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Sell treasury bonds on the open market
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Raise interest on reserves
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Raise the discount rate.
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Detailed explanation-1: -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-2: -As mentioned earlier, during a recession the Fed usually buys short-term government bonds, which has the effect of driving down short-term interest rates.
Detailed explanation-3: -Consider, first, why the Fed buys bonds to boost growth and inflation. Bond-buying, or “quantitative easing” (QE), works via the so-called credit channel. That is, it encourages banks to lend more. When the Fed buys bonds from banks, their cash reserves at the Fed go up.
Detailed explanation-4: -If the Fed buys bonds in the open market, it increases the money supply in the economy by swapping out bonds in exchange for cash to the general public. Conversely, if the Fed sells bonds, it decreases the money supply by removing cash from the economy in exchange for bonds.