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Question

Difficulty: MediumMonetary Policy, Fiscal Policy, and Economic Tools

Match each macroeconomic policy action to its corresponding governing body and economic policy classification.

  • Increasing corporate tax ratesContractionary fiscal policy enacted by Congress
  • Raising the Interest on Reserve Balances (IORB) rateContractionary monetary policy administered by the Federal Reserve
  • Authorizing new federal infrastructure spending grantsExpansionary fiscal policy enacted by Congress
  • Selling U.S. Treasury bills through open market operationsContractionary monetary policy administered by the Federal Reserve (FOMC)

Answer

Increasing corporate tax rates matches with contractionary fiscal policy by Congress. Raising the IORB rate matches with contractionary monetary policy by the Federal Reserve. Authorizing federal infrastructure spending matches with expansionary fiscal policy by Congress. Selling Treasury securities matches with contractionary monetary policy by the Federal Reserve.
Tax adjustments and federal appropriations are fiscal policies managed by Congress. Open market operations and interest rates paid on reserve balances are monetary policy tools administered by the Federal Reserve.

Step-by-Step Solution

1
Distinguish between fiscal policy tools and monetary policy tools.
Taxation and government spending are fiscal policy tools set by Congress. IORB and open market operations are monetary policy tools set by the Federal Reserve Board/FOMC.
Fiscal policy relates to federal budget decisions by elected officials, whereas monetary policy concerns money supply and credit control by the central bank.
2
Determine the economic intent (expansionary vs. contractionary) of each tool.
Higher taxes, higher IORB rates, and selling securities decrease money circulating in the economy (contractionary). Increasing spending injects money directly into the economy (expansionary).
Contractionary policies aim to curb inflation by slowing money growth, while expansionary policies aim to boost output and employment.
3
Pair each specific action to its authority and policy type.
Match left_1 to right_1, left_2 to right_2, left_3 to right_3, and left_4 to right_4.
Each action aligns precisely with the legal authority and economic objective of that policy tool.

Key Concept

Fiscal Policy vs. Monetary Policy Authority and Tools
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Topics

Monetary Policy, Fiscal Policy, and Economic Tools

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