Question
nnnnIf the Federal Reserve wants to increase the amount of money available to member banks to ease a tight money market, it could:
nnnnSelections
nnnn• A. Raise the discount rate to its member banks
nnnn• B. Lower the minimum reserves required by its member banks
nnnn• C. Raise the minimum reserves required by its member banks
nnnn• D. Sell government bonds
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Answer: B
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5 Keys Summary
nnnn• To ease a tight money market (when demand for money is high and supply is low), the Federal Reserve must employ expansionary monetary policy to stimulate economic growth.
nnnn• The correct expansionary action available to the Federal Reserve (the Fed) is to lower the minimum reserves required by its member banks.
nnnn• Reserve requirements are the amounts of cash or credit deposits banks must set aside; reducing these requirements allows banks to lend out a significantly higher percentage of their deposited funds.
nnnn• This action increases the total supply of funds in the banking system, making more money available for loans to consumers and businesses.
nnnn• Actions like raising the discount rate, raising minimum reserves, or selling government securities are all considered contractionary policies intended to slow down the economy and decrease the money supply.
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