ECONOMICS
MONETARY POLICY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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A decrease in income tax rates
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A decrease in the discount rate
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An open market purchase of government securities by the central bank
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An increase in reserve requirements
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An increase in government expenditures on goods and services
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Detailed explanation-1: -By lowering the reserve requirements, banks are able to loan more money, which increases the overall supply of money in the economy. Conversely, by raising the banks’ reserve requirements, the Fed is able to decrease the size of the money supply.
Detailed explanation-2: -When the Fed buys securities on the open market, cash is transferred to these banks, increasing the nation’s money supply. Conversely, when the Fed sells government securities, these banks have less cash available to them – a decrease in the nation’s money supply.
Detailed explanation-3: -Which of the following will result in a decrease in the supply of money in the economy? When a borrower is paying off a loan, the bank collects the borrower’s currency. If no new loans are created from this currency, then the money supply shrinks.
Detailed explanation-4: -Which of the following will lead to a decrease in a nation’s money supply. An increase in reserve requirements causes the money multiplier to decrease.
Detailed explanation-5: -The Fed controls the supply of money by increasing or decreasing the monetary base. The monetary base is related to the size of the Fed’s balance sheet; specifically, it is currency in circulation plus the deposit balances that depository institutions hold with the Federal Reserve.