Question

Think about the two types of monetary policy: expansionary and contractionary. Using what you have learned about open market operations, determine whether the noted actions below coincide with expansionary monetary policy or contractionary monetary policy. In a few sentences explain how.

Action: Government securities are sold by the Fed.

1. Expansionary

2. Contractionary

Action: The federal funds rate decreases.

3. Expansionary

4. Contractionary

Action: The money supply increases.

5. Expansionary

6. contractionary

Answer 1

Answer:

Action: Government securities are sold by the Fed.

Policy: Contractionary

Explanation: When government securities are sold by the Fed then it collected money against these securities because of which money supply in the economy decreased. When Fed take any action that leads to fall in money supply comes under its contractionary policy.

Action:The federal funds rate decreases.

Policy: Expansionary.

Explanation: Federal funds rate is the rate at which banks borrow from Fed or from other banks. When Federal funds rate decreases it will lead to increase in the amount of loans because of which more money will be available for circulating in the economy.

Action: The money supply increases.

Policy: Expansionary.

Explanation: Under the expansionary monetary policy Fed takes various measures to increase the supply of money in the economy. Now that the money supply is increased, it is due to the expansonary monetary policy of the Fed.