m/ibiscms/mod/ibis/vi . c I-, Macmillan L City University of New York...X Elluci

Question

m/ibiscms/mod/ibis/vi . c I-, Macmillan L City University of New York...X Ellucia estion 11 ot 22 Map Sapling Learning Classify the actions described below as examples of expansionary or contractionary (restrictive) monetary policy Expansionary monetary easy money policy Contractionag)gfpt monyipe lioy A decrease in the A central bank are required to keep in vaults market. The Federal Reserve selling bonds on the open market the discount rate. perce ntageof dsthba Federal Reserve purchasing bonds on the open A central bank reducing the rate of interest that it charges to commercial banks on loans @check Ansa erNex3 8 EE-

Explanation / Answer

The answers are in sequence from left to right:

1. Expansionary

Reason: A decrease in discount rate will increase the credit creation capacity of the banks thereby increasing the money supply in the economy.

2. Contractionary

Reason: As the banks are required to keep more deposits in the vaults, the credit creation capacity if the banks decreases thereby reducing money supply in the economy.

3. Contractionary

Reason: Selling of bonds by Fed will directly reduce money supply as bank and non-bank public purchases these bonds with domestic currency.

4. Expansionary

Reason: Purchasing of bonds by Fed will leave more money with the bank and non-bank public thereby increasing the overall money supply in the economy.

5. Expansionary

Reason: Reducing the interest rate charged to commercial banks, the credit creation capacity of the banks increases thereby increasing the money supply in the economy.

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