During a period of economic trough, policymakers aim to increase liquidity and stimulate business expansion. Which of the following represent expansionary monetary policy tools directly controlled by the Federal Reserve? (Select all that apply.)
- Conducting open market purchases of Treasury securities from primary dealersAnswer
- Reducing the discount rate charged on short-term loans to borrowing depository institutionsAnswer
- CLowering federal marginal tax rates across individual income brackets to boost consumer spending
- DUtilizing changes in the prime rate set by commercial banks as a primary economic tool to directly adjust money supply
Answer
The policy actions that represent expansionary monetary tools directly controlled by the Federal Reserve are conducting open market purchases of Treasury securities from primary dealers and reducing the discount rate charged on short-term loans to borrowing depository institutions.
Expansionary monetary policy intended to stimulate the economy involves actions by the Federal Reserve that increase liquidity in the banking system. Buying Treasury securities through open market operations directly places cash into primary dealer accounts, expanding money supply. Simultaneously, decreasing the discount rate lowers borrowing costs for banks seeking short-term liquidity from the Fed's discount window, promoting credit availability.
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Key Concept
Distinguishing Federal Reserve Monetary Tools from Fiscal Policy and Commercial Bank Rates