The major problem facing the economy is high unemployment and weak economic growth. The inflation rate is low and stable. Therefore, the Federal Reserve decides to pursue a policy to increase the rate of economic growth. Which policy changes by the Fed would reinforce each other to achieve that objective?

Question

Quizplus · Accepted Answer

Buying government securities would increase the money supply in the economy, which would reduce interest rates and encourage borrowing and investment. Lowering the discount rate would further reduce borrowing costs for banks, stimulating lending and economic activity. These two policies would reinforce each other and have a stimulatory effect on the economy, which would hopefully reduce unemployment and increase economic growth. Selling government securities and raising the discount rate would have the opposite effect, reducing the money supply and increasing borrowing costs, which would likely harm economic growth. Buying securities and raising the reserve ratio would increase bank reserves, but this would not necessarily encourage lending and economic activity.

The Major Problem Facing the Economy Is High Unemployment and Weak