If the economy was operating below full employment and inflation was low, what measures could the central bank undertake to address this situation: Group of answer choicesDecrease the cash rate by selling government bonds.Increase the cash rate by selling government bonds.Increase the cash rate by buying government bonds.Decrease the cash rate by buying government bonds.
Question
If the economy was operating below full employment and inflation was low, what measures could the central bank undertake to address this situation: Group of answer choicesDecrease the cash rate by selling government bonds.Increase the cash rate by selling government bonds.Increase the cash rate by buying government bonds.Decrease the cash rate by buying government bonds.
Solution
The central bank could undertake to decrease the cash rate by buying government bonds.
Here's why:
Step 1: If the economy is operating below full employment, it means there is a lack of demand in the economy. This lack of demand is keeping businesses from hiring more workers.
Step 2: By decreasing the cash rate, the central bank makes borrowing cheaper. This encourages businesses and consumers to borrow and spend more.
Step 3: The central bank can decrease the cash rate by buying government bonds. This increases the supply of money in the economy, which lowers the cost of borrowing.
Step 4: The increased spending can stimulate demand, leading to more hiring and moving the economy towards full employment. At the same time, because inflation is low, the risk of sparking excessive inflation with this policy is minimal.
Similar Questions
Which of the following actions of a central bank would decrease the money supply in the economy?A.Increase the target interest rateB.Decrease the minimum reserve requirement.C.Reduce the interest rate paid on bank reserve.D.Buy bonds through open market operations.
Which of the following actions that a central bank take to reduce inflation?This is a multi answer question. You can select one or more options as the answer.A.Purchase government bonds from banks or the public through open-market purchases.B.Increase the cash rate.C. Increase minimum reserve ratio.D.Reduce interest rate on reserve accounts.
Which one of the following measures of the Central bank would not lead to reduction of money supply?A.Imposing regulations to increase minimum reserve ratio of the banksB.Purchasing of government bonds from banksC.Selling of government bonds to the publicD.Increasing of cash rate (Policy rate)
Which of the following policy actions by a country’s central bank would increase the money supply in the economy?a.Decreasing the policy rate.b.Increasing the minimum reserve requirements.c.Selling government bonds through open market operations.d.Raising the interest paid on bank reserves deposited with the central bank.
If the economy is in a recession, the central bank could do all of the following EXCEPTa.Lower taxesb.Lower the Discount ratec.Lower the Funds rated.Buy securitiesClear my choice
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