In evaluating governmental authority, regulatory economic tools, and macroeconomic metrics used to manage business cycles, which of the following statements accurately describe monetary policy actions, fiscal policy implementations, or economic indicator dynamics? Select all that apply.
- The Federal Reserve increasing bank reserve requirements acts as a contractionary monetary policy by restricting the amount of funds available for commercial banks to lend.Answer
- Congress raising individual income tax rates while reducing federal expenditures represents a contractionary fiscal policy intended to decrease aggregate market demand.Answer
- CThe Federal Open Market Committee (FOMC) purchasing Treasury securities in the secondary market functions as a fiscal policy action that drains bank reserves.
- DAn inverted yield curve, where long-term bond yields rise significantly above short-term bond yields, serves as a primary indicator of impending rapid economic expansion.
Answer
The correct statements are that Federal Reserve increases in reserve requirements operate as contractionary monetary policy, and Congressional tax hikes combined with spending cuts operate as contractionary fiscal policy.
The statement regarding Federal Reserve reserve requirements is correct because raising reserve requirements forces banks to keep more capital in vault/reserve, reducing money available for lending and contracting money supply. The statement regarding tax rates and spending is correct because tax increases and spending reductions are the core tools of contractionary fiscal policy legislated by Congress to reduce total spending power in the economy.
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Key Concept
Monetary Policy, Fiscal Policy, and Economic Tools