THE GREAT DEPRESSION 1929 1940
THE GREAT DEPRESSION
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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It reduced interest rates, which discouraged spending
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It reduced the money supply, which limited the amount of money in circulation
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It reduced the percentage required to buy stock on margin, which increased speculation
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It reduced the federal funds rate, which increased the amount banks held in reserve
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Detailed explanation-1: -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.
Detailed explanation-2: -Conducting monetary policy If the Fed, for example, buys or borrows Treasury bills from commercial banks, the central bank will add cash to the accounts, called reserves, that banks are required keep with it. That expands the money supply.
Detailed explanation-3: -The implication of tight monetary policy is to bring down inflation by limiting the circulation of money in the economy. It makes money more expensive to borrow by increasing short-term interest rates. Thus, a nation’s central bank takes corrective action to save the economy from slipping into hyperinflation.
Detailed explanation-4: -The same process works for decreasing the monetary base: The Fed sells securities, getting a check from a bank in exchange. When the check is deposited, the bank’s balance at the Fed decreases.