Question

18. Suppose the Federal pose the Federal Reserve opted to implement monetary policy by decreasing the interest id on excess reserves. This would be an example of a. Expansionary monetary policy b. Contractionary monetary policy c. Discretionary monetary policy d. Exemplary monetary policy 19, A policy decision by the Federal Reserve to sell short-run U.S. securities out of the New York branch would be an example of a. Expansionary monetary policy through decreasing the federal funds rate b. Contractionary monetary policy through increasing the reserve requirement c. Expansionary monetary policy through decreasing the discount rate d. Contractionary monetary policy through increasing the federal funds rate

Answer 1

Ans 18 )    a) Expansionary monetary policy : because lowering interest rates on excess reserves will force banks to keep less of excess reserves and use it to further grant loans to the general public which will further increase the money supply in the economy.

Ans 19 )    d) Contractionary monetary policy through increasing the federal funds rate : because selling short-run US securities will absorb cash from the market and hence decrease the money supply or purchasing power in hands of the buyer. The securities will only be bought if they come with high interest rate as return to buyers.