Question

If the Fed's policy is contractionary, it will

A) use open market operations to buy Treasury bills.
B) use open market operations to sell Treasury bills.
C) lower the reserve requirement.
D) lower the discount rate.

Answer 1

In a contractionary monetary policy, the Federal Reserve can sell Treasury bills and lower the discount rate to reduce the money supply and raise interest rates.

Step-by-step explanation:

In a contractionary monetary policy, the Federal Reserve follows various methods to reduce the money supply and raise interest rates. One of these methods is using open market operations to sell Treasury bills. By selling Treasury bills, the Fed decreases the money supply and increases interest rates.

Another method is to lower the discount rate. When the discount rate is lowered, commercial banks borrow fewer reserves from the Fed, which reduces the money supply and raises market interest rates.