Which action would the FED most likely take as part of an expansionary monetary policy? A) increase the discount rate B) increase the reserve requirement Eliminate C) buy securities on the open market D) increase the rate on required reserves

Question

Social Studies

Kaylee Barron

14 October, 18:10

Which action would the FED most likely take as part of an expansionary monetary policy? A) increase the discount rate B) increase the reserve requirement Eliminate C) buy securities on the open market D) increase the rate on required reserves

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Answers (2)

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Caitlin Armstrong · Answer 1

The correct answer is C.

The aim of an expansionary monetary policy is to increase the money supply, hence, the amount of money in circulation in the economy. A central bank can do so by buying securities, as the money paid for them is pulled into the economy and it accumulates to the existing money supply, increasing the amount of money in circulation.

On the contrary, the other 3 measures listed could be useful for conducting a contractionary monetary policy.

Options B and C refer to increasing the reserve requirements, which means that banks are oblied to keep a larger amount of money in cash (therefore that cash is taken out of circulation). Option A involves increasing the interest rate, which means that borrowing money becomes relatively more expensive and its demand decreases.

Walter Bray · Answer 2

Answer is C