Question

Which actions would the Federal Reserve most likely take to encourage economic growth? Lower reserve requirement and lower discount rate Raise reserve requirement and raise discount rate Buy government securities and raise reserve requirement Sell government securities and raise discount rate

Answer 1

The actions that the Federal Reserve would most likely take to promote economic growth are:

Sell ​​government securities and increase the discount rate.

The federal reserve sells government securities as a tool to issue debt and enter the circuit greater amount of money in the present with the commitment to be returned in future to investors.

The measure that drives investors to want to buy treasury securities is the increase in the discount rate. The higher discount rate allows investors to increase the profitability of their financial investment and encourages them to withdraw funds invested in the rest of the world and bring them to the United States.

In a second stage, the money collected through financial investment is channeled to the domestic economy to boost its reactivation or growth, through higher credits, salaries, public spending, etc.

This mechanism is not carried out indefinitely because, as a counterpart, it can cause an increase in inflation and favor cyclical crises whose effects can be very counterproductive.