Classify the actions described as examples of expansionary monetary policy intended to stimulate the economy, restrictive monetary policy meant to slow down the economy, or not an example of monetary policy.
The Federal Reserve selling bonds on the open market is not an example of monetary policy.
The President signing legislation that extends the duration of unemployment benefits for people is not an example of monetary policy.
The Federal Reserve purchasing bonds on the open market is an example of monetary policy.
The Federal Reserve decreasing the discount rate is an example of monetary policy.
A major credit card company lowering the interest rate on outstanding credit card balances is not an example of monetary policy.
The Federal Reserve increasing the percentage of deposits that commercial banks are required to hold is an example of monetary policy.
The correct answer and explanation is :
Correct Classification of the Statements:
- The Federal Reserve selling bonds on the open market → Restrictive monetary policy
- The President signing legislation that extends the duration of unemployment benefits for people → Not an example of monetary policy
- The Federal Reserve purchasing bonds on the open market → Expansionary monetary policy
- The Federal Reserve decreasing the discount rate → Expansionary monetary policy
- A major credit card company lowering the interest rate on outstanding credit card balances → Not an example of monetary policy
- The Federal Reserve increasing the percentage of deposits that commercial banks are required to hold → Restrictive monetary policy
Explanation:
Monetary policy refers to actions taken by a central bank, such as the Federal Reserve, to manage the economy by controlling money supply and interest rates. It is categorized as either expansionary (stimulating economic activity) or restrictive (slowing down economic activity).
- Expansionary monetary policy is used to boost economic growth, particularly in times of recession. The Federal Reserve does this by purchasing bonds on the open market, which injects money into the banking system, making borrowing cheaper and encouraging spending and investment. Similarly, decreasing the discount rate (the interest rate at which banks borrow from the Fed) lowers borrowing costs, encouraging more loans and economic activity.
- Restrictive monetary policy aims to slow down inflation and economic overheating. The Federal Reserve achieves this by selling bonds, which removes money from the banking system, reducing the money supply and increasing interest rates. Additionally, raising the reserve requirement forces banks to hold more money in reserve, reducing their ability to lend, thereby decreasing the money supply and curbing excessive spending.
- Actions like unemployment benefits extensions and credit card interest rate changes are not examples of monetary policy. The former is a fiscal policy decision made by the government, while the latter is a business decision by a private financial institution.