Question

As a result of monetary policy of the Fed, the dollar appreciated and the amount of exports decreased. Which of the following Fed policies could have caused this outcome?A. A decrease in the reserve requirement ratio.B. A decrease in the discount rate.C. A Fed purchase of bonds from banks.D. A Fed sale of bonds to brokers and banks.

Answer 1

Answer:

D. A Fed sale of bonds to brokers and banks.

Explanation:

The sale of bonds to banks and brokers is a contractionary open market policy. Its objective is to check inflation by slowing down the rate of economic growth. When the Fed offer bonds to the markets at a higher interests rate, banks will prefer to buy the bonds than lending out money to household and firms.

Producers rely on banks to fund their operations. If they cannot obtains loans for production and growth, their output decreases. A decrease in output results in reduced exports.  Low production of US goods means a reduced supply to the international market. It means international buyers will be competing for fewer US products. As the markets compete for the few available products, they push the demand for the dollar up, causing it to appreciate in value.