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 Each Action:
- The Federal Reserve selling bonds on the open market: Restrictive monetary policy
- Explanation: Selling bonds reduces the money supply in the economy. When the Federal Reserve sells bonds, it takes money out of circulation as investors pay for the bonds, thus tightening liquidity. This is typically done when the economy is overheating, to slow down inflation.
- The President signing legislation that extends the duration of unemployment benefits for people: Not an example of monetary policy
- Explanation: This action is fiscal policy, not monetary policy. Fiscal policy involves government decisions on taxation and spending, whereas monetary policy is carried out by a central bank (such as the Federal Reserve) to manage the money supply and interest rates.
- The Federal Reserve purchasing bonds on the open market: Expansionary monetary policy
- Explanation: When the Federal Reserve buys bonds, it injects money into the economy, increasing the money supply. This is done to lower interest rates and encourage borrowing and investment, which stimulates economic activity, typically during times of recession or slow growth.
- The Federal Reserve decreasing the discount rate: Expansionary monetary policy
- Explanation: The discount rate is the interest rate the Federal Reserve charges commercial banks to borrow money. Lowering the discount rate makes borrowing cheaper for banks, which can encourage them to lend more to consumers and businesses, thus stimulating economic activity. This is an expansionary policy designed to boost the economy.
- A major credit card company lowering the interest rate on outstanding credit card balances: Not an example of monetary policy
- Explanation: This is an action taken by a private financial institution, not a central bank. While the credit card company’s actions may have some influence on consumer spending, it does not constitute monetary policy, which is the domain of central banks like the Federal Reserve.
- The Federal Reserve increasing the percentage of deposits that commercial banks are required to hold: Restrictive monetary policy
- Explanation: This action is known as increasing the reserve requirement. By increasing the percentage of deposits that banks must hold in reserve, the Federal Reserve reduces the amount of money available for lending. This slows down economic activity by limiting credit availability, which is a restrictive monetary policy tool.
Summary:
Monetary policy is the process by which a central bank (e.g., the Federal Reserve) manages the money supply and interest rates to influence economic activity. Expansionary monetary policy aims to stimulate the economy, while restrictive monetary policy aims to slow it down. Actions that involve changes to the money supply or interest rates by the central bank are considered monetary policy, while actions taken by government or private entities, such as extending unemployment benefits or lowering credit card interest rates, are not.