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 Actions:
- 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 the actions taken by a central bank, such as the Federal Reserve, to influence the money supply and interest rates to either stimulate or slow down economic activity. Expansionary monetary policy aims to boost economic growth by increasing money supply and lowering borrowing costs, while restrictive monetary policy seeks to reduce inflation by decreasing money supply and raising borrowing costs.
When the Federal Reserve purchases bonds, it injects money into the economy, lowering interest rates and encouraging borrowing and investment, making it an expansionary policy. Similarly, lowering the discount rate, which is the interest rate at which banks borrow from the Fed, makes credit cheaper, further stimulating economic activity.
Conversely, when the Federal Reserve sells bonds, it removes money from circulation, increasing interest rates and slowing down the economy, making it a restrictive policy. Similarly, increasing the reserve requirement forces banks to hold more money, reducing their lending ability and slowing economic growth.
Actions like extending unemployment benefits or credit card companies lowering interest rates do not fall under monetary policy because they are fiscal policy decisions or private business actions, respectively.