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Difficulty: EasyMonetary Policy, Fiscal Policy, and Economic Tools

Which of the following actions is an example of fiscal policy implemented by the U.S. Congress, rather than a monetary policy tool used by the Federal Reserve?

  1. Decreasing corporate income tax rates to encourage business investmentAnswer
  2. B
    Selling U.S. Treasury securities through open market operations
  3. C
    Adjusting the interest rate paid on reserve balances (IORB)
  4. D
    Lowering the discount rate charged for direct loans to commercial banks

Answer

Decreasing corporate income tax rates to encourage business investment
Decreasing corporate income tax rates is an action taken by Congress through federal tax legislation, which defines fiscal policy. In contrast, open market operations, interest on reserve balances, and discount rate modifications are monetary policy instruments executed by the Federal Reserve.

Step-by-Step Solution

1
Distinguish between fiscal policy and monetary policy responsibilities.
Fiscal policy relates to national taxation and government spending (enacted by Congress), whereas monetary policy relates to money supply and interest rate management (controlled by the Federal Reserve).
Identifying the governing body determines the category of economic tool.
2
Evaluate each choice for Congressional legislative action.
Decreasing corporate income tax rates requires legislative action by Congress, making it fiscal policy.
Tax policy changes can only be enacted through statutory law passed by Congress.

Key Concept

Fiscal policy tools (taxation rates and government spending) are established by Congress, while monetary policy tools (open market operations, interest on reserve balances, and the discount rate) are managed by the Federal Reserve.
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Topics

Monetary Policy, Fiscal Policy, and Economic Tools

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