Final answer:
The correct answer is option c. The correct option for an expansionary action taken by a central bank is the purchase of government bonds. This increases the money supply and stimulates economic activity, as opposed to other options which are contractionary in nature.
Step-by-step explanation:
The student asked which of the following actions taken by a central bank is expansionary. The options provided include increasing the reserve requirement, none of the answers being correct, purchases of government bonds, and increasing its policy interest rate. To address this question, it is necessary to understand the mechanisms of monetary policy and how a central bank influences the economy.
Expansionary monetary policy aims to increase the money supply in the economy and usually involves lower interest rates and increased access to credit. Central banks utilize several tools to implement this policy: open market operations, reserve requirements, and the discount rate.
Open market operations, which is the most commonly used tool by central banks, involve the buying and selling of government bonds. When a central bank purchases government bonds, it pays out money which flows to individual banks in the economy. This action increases the banks' reserves and the overall money supply in circulation. Conversely, when a central bank sells government bonds, it collects money from the individual banks, which decreases the money supply.
Increasing the reserve requirement compels banks to hold a greater portion of their deposits as reserves, which reduces the amount they have available to lend out, and is considered a contractionary action. Similarly, an increase in the central bank's policy interest rate tends to make borrowing more expensive, which also reduces the money supply and is therefore contractionary.
The correct option for an expansionary action by a central bank would be purchases of government bonds (option c). This action increases liquidity and the money supply, thereby stimulating economic activity.