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:
- The Federal Reserve selling bonds on the open market – Restrictive monetary policy
- The President signing legislation that extends the duration of unemployment benefits – 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 influence the economy by controlling the money supply and interest rates. It can be either expansionary (stimulating economic growth) or restrictive (slowing down the economy to curb inflation).
- Selling bonds on the open market is a restrictive policy because it reduces the money supply, making borrowing more expensive and slowing down economic activity.
- The President signing unemployment benefit legislation is a fiscal policy action, not a monetary policy action, since it involves government spending rather than central bank measures.
- Purchasing bonds on the open market increases the money supply, lowers interest rates, and encourages lending and investment, making it expansionary.
- Decreasing the discount rate (the interest rate banks pay to borrow from the Fed) makes borrowing cheaper, encouraging banks to lend more, which boosts economic activity—this is an expansionary policy.
- A credit card company lowering interest rates is a business decision, not a central bank action, so it is not monetary policy.
- Increasing the reserve requirement forces banks to hold more money and lend less, reducing the money supply, which slows the economy, making it a restrictive policy.