NASAA Series 65, Uniform Investment Adviser Law ExaminationEconomic Factors and Business InformationMedium
A central bank implements a policy to increase the money supply, aiming to stimulate economic growth. Which of the following actions would typically be associated with such a policy?
- ARaising the reserve requirement for banks.
- BDecreasing the federal funds rate target.
- CIncreasing the discount rate.
- DSelling government securities in the open market.
Show answer & explanationAnswer & explanation
Correct answer: B. Decreasing the federal funds rate target.
To stimulate economic growth by increasing the money supply, a central bank would typically implement an expansionary monetary policy. Decreasing the federal funds rate target encourages banks to lend more, increasing the money supply.
Why the other options are wrong
- A. Raising the reserve requirement forces banks to hold more money, reducing the money available for lending.
- C. Increasing the discount rate makes it more expensive for banks to borrow from the central bank, discouraging lending and contracting the money supply.
- D. Selling government securities removes money from circulation, contracting the money supply.
Expansionary Monetary Policy
Actions by a central bank to increase the money supply and stimulate economic growth.
- Aims to lower interest rates.
- Encourages borrowing and spending.
- Can lead to inflation if overdone.
Memory trick: The Fed pulls levers to warm or cool the economy.