Match each macroeconomic policy action on the left with its corresponding institutional authority, operational mechanism, and intended economic effect on the right.
- Federal Open Market Committee (FOMC) purchasing U.S. Treasury securities in the secondary marketExpansionary monetary policy tool that directly injects reserves into the commercial banking system, putting downward pressure on short-term interest rates.
- Federal Reserve increasing the Interest on Reserve Balances (IORB) rateContractionary monetary policy tool that sets a higher interest rate floor, enticing commercial banks to hold excess cash at the central bank rather than lending it out.
- Congress enacting legislation to increase corporate income tax rates and curtail infrastructure outlaysContractionary fiscal policy action implemented by legislative authority to cool an overheating economy by reducing disposable income and federal demand.
- Federal Reserve increasing the discount rate charged for direct central bank lendingContractionary monetary policy tool that increases borrowing costs for depository institutions seeking emergency or short-term liquidity at the discount window.
Answer
The policy actions match their descriptions based on authority (Federal Reserve for monetary vs. Congress for fiscal) and economic direction (expansionary vs. contractionary). Purchasing Treasuries expands bank reserves (monetary expansion); raising the IORB rate encourages banks to retain excess reserves at the central bank (monetary contraction); raising tax rates and reducing federal outlays cuts aggregate demand (fiscal contraction); and raising the discount rate elevates direct central bank credit costs (monetary contraction).
Each policy action matches its target description based on institutional control (Federal Reserve vs. Congress) and monetary/fiscal direction. Open market purchases expand banking reserves and lower short-term rates. The IORB rate sets an interest floor encouraging banks to hold excess reserves. Tax increases paired with spending cuts represent legislative fiscal contraction. Raising the discount rate increases direct borrowing costs for depository institutions at the central bank window.
Step-by-Step Solution
Key Concept
Monetary Policy vs. Fiscal Policy Tools and Operational Mechanics