Question

To lower the monetary policy rate, the Central bank should

A. Buy government securities.
B. Raise the Treasury bill rate.
C. Raise the exchange rate.
D. Decrease bank reserves.

Answer 1

To lower the monetary policy rate, the Central bank should buy government securities as part of open market operations, increasing bank reserves and lowering market interest rates.

Step-by-step explanation:

To lower the monetary policy rate, the Central bank should buy government securities. This action is part of what is known as open market operations, which is the most commonly used tool by central banks to conduct monetary policy. When the central bank purchases government securities, it increases the reserves of the banks, leading to more loanable funds in the banking system, which can then cause the market interest rates to drop. Conversely, raising the Treasury bill rate or the exchange rate, or decreasing bank reserves would typically act to raise interest rates, not lower them.