A financial advisor is reviewing macroeconomic interventions with a client to explain how government and central bank actions impact the economy. Match each macroeconomic policy action on the left with its corresponding authority, policy classification, and liquidity effect on the right.
- Raising the Interest on Reserve Balances (IORB) rateContractionary monetary policy tool directed by the Federal Reserve to incentivize banks to hold reserves, reducing money supply liquidity.
- Decreasing marginal income tax rates across consumer bracketsExpansionary fiscal policy tool enacted by Congress to increase consumer disposable income and stimulate private sector demand.
- Purchasing U.S. Treasury securities through Open Market OperationsExpansionary monetary policy action conducted by the Federal Reserve Trading Desk to inject money directly into the banking system.
- Increasing federal legislative appropriations for infrastructure projectsExpansionary fiscal policy action passed by Congress to directly increase government outlays and boost aggregate demand.
Answer
Matching pairs: Raising the IORB rate matches contractionary monetary policy by the Fed; Decreasing tax rates matches expansionary fiscal policy by Congress increasing disposable income; Purchasing Treasury securities matches expansionary monetary policy by the Fed injecting liquidity; Increasing infrastructure spending matches expansionary fiscal policy by Congress increasing direct public outlays.
The correct matches accurately separate the actions of the Federal Reserve (Monetary Policy) from those of Congress (Fiscal Policy). Raising the IORB rate is a central bank monetary contraction action. Lowering income tax rates is a congressional expansionary fiscal measure that boosts disposable income. Buying Treasuries is an expansionary open market monetary operation that adds bank reserves. Infrastructure spending is an expansionary fiscal expenditure authorized by the legislature.
Step-by-Step Solution
Key Concept
Monetary vs. Fiscal Policy Authority and Operational Tools