A senior market strategist is analyzing government and central bank actions designed to cool an overheating macroeconomy. Which of the following policy actions represent contractionary monetary policy measures administered directly by the Federal Reserve Board, as opposed to fiscal policy interventions legislated by Congress? Select all that apply.
- Raising the Interest on Reserve Balances (IORB) rate to incentivize depository institutions to hold reserves rather than lend them.Answer
- Increasing the discount rate charged to financial institutions borrowing directly from the central bank's discount window.Answer
- CReducing statutory federal tax credits for private business spending on capital equipment.
- DDecreasing annual legislative appropriations allocated to federal public works and infrastructure projects.
Answer
Raising the Interest on Reserve Balances (IORB) rate and increasing the discount rate are monetary policy actions controlled by the Federal Reserve. Reducing tax credits and decreasing federal budget appropriations are fiscal policy actions legislated by Congress.
The Federal Reserve regulates money supply and interest rates through monetary policy. Raising the Interest on Reserve Balances (IORB) rate encourages commercial banks to retain funds at the Fed rather than extending loans, thereby restricting money growth. Raising the discount rate increases the cost of direct borrowing from the Fed, discouraging bank credit expansion. Both actions are contractionary monetary tools controlled by the central bank.
Step-by-Step Solution
Key Concept
Distinction between Federal Reserve Monetary Policy Tools and Congressional Fiscal Policy Tools
Estimated Time:2m 0s