Question

The major problem facing the economy is high unemployment and weak economic growth. The inflation rate is low and stable. Therefore, the Federal Reserve decides to pursue a policy to increase the rate of economic growth. Which policy changes by the Fed would tend to offset each other in trying to achieve that objective?
a. selling government securities and raising the discount rate
b. selling government securities and lowering the discount rate
c. buying government securities and lowering the discount rate
d. buying government securities and raising the reserve ratio

Answer 1

Answer:

The correct answer is option d.

Explanation:

The economy is currently experiencing a high unemployment rate and weak economic growth. The inflation rate is low. In this situation to boost economic growth, the government needs to adopt an expansionary policy.

Buying government securities is an expansionary monetary policy. It would lead to an increase in the money supply. Commercial banks will be able to provide more credit.

Raising the reserve ratio will cause the excess reserves to decline. These two policy changes will thus offset each other.