Question

Which statement best reflects the Fed's approach to expansionary monetary policy before the mortgage debt crisis

Answer 1

Complete Question:

Which statement best reflects the Fed's approach to expansionary monetary policy before the mortgage debt crisis? Multiple Choice The Fed would announce a lower target for the federal funds rate, then increase the supply of reserves through a balanced combination of the monetary policy tools. The Fed would quietly begin using open-market operations to increase the supply of reserves, with secrecy critical to not alarming securities markets The Fed would announce a lower target for the federal funds rate, then rely primarily on open market operations to increase the supply of reserves The Fed would itself lower the federal funds rate and then use a varied combination of monetary policy tools to increase the supply of reserves

Answer:

The Fed would announce a lower target for the federal funds rate, then increase the supply of reserves through a balanced combination of the monetary policy tools.

Explanation:

The Federal Reserve achieves expansionary monetary policy by announcing lower targets for the federal funds rate, increasing the supply of reserves using a mix of monetary policy tools, including the discount rate, reserve requirements, open market operations, and interest on reserves  The federal funds rate is the interest rate at which banks with excess reserves lend to other banks in need.  By lowering this rate, many banks are encouraged to borrow.  This monetary expansion increases the supply of money in the economy which leads to increased productivity, more employment, etc.