Question

Which of the following statements lists contractionary monetary policies?

A) The Fed sells bonds, lowers the discount rate, and raises the reserve requirements.

B) The Fed sells bonds, lowers the discount rate, and lowers the reserve requirements.

C) The Fed purchases bonds, lowers the discount rate, and lowers the reserve requirements.

D) The Fed sells bonds, raises the discount rate, and raises the reserve requirements.

Answer 1

Option D

Explanation: A contractionary monetary policy reduces the money supply. When the Fed sells bonds, the money flows from the banking system to the Fed. When the Fed raises the discount rate, it becomes costlier for banks to borrow from the Fed and as a result banks borrow less from the Fed. Finally, when the Fed raises the reserve requirements, banks are required to park more money as a reserve with the Fed. All these events lead to a lower money supply in the banking system. So, these are contractionary monetary policies.