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This question is a part of BIF's Special Webinar series which was created to help students affected by the July 2020 CFP® Exam postponement to September 2020.
Which of the following monetary policy actions by the Federal Reserve would promote economic expansion?
- Fed raises the discount rate.
- Fed lowers the reserve requirements.
- Fed sells securities.
- Fed lowers the discount rate.
- Fed buys securities.
- I, II, and III
- I and III
- II, III, and IV
- II and III
- II, IV, and V
Scroll for answer...
Correct answer: E. II, IV, and V
Instructor insight:
To promote economic expansion, the Federal Reserve will implement strategies to ease lending and infuse capital into the economy. Of the options available, lowering the reserve requirements and lowering the discount rate will bring lending rates down and encourage borrowing.
By buying securities, the Fed is purchasing Treasuries in exchange for money. This results in a capital infusion into the economy which promotes spending and growth.
CFP® Exam insight:
Follow the direction of cash flow to determine the effects on the economy. When the Fed is buying securities, cash is disbursed into the economy in exchange for securities. This is an expansionary action, intended to promote economic growth.
When the Fed is selling securities, cash is removed from the economy in exchange for securities. This is a restrictive action, intended to “cool-down” or contract the economy.
