CFA Practice Question

CFA Practice Question

In order to implement a more expansionary monetary policy, would an effective strategy for a government's central bank include:

Selling government securities?
Raising reserve requirements?
A. Yes; No
B. No; Yes
C. No; No
Explanation: Selling government securities and raising reserve requirements would both serve to decrease the supply of money, which would be inconsistent with implementing a more expansionary monetary policy.

User Contributed Comments 3

User Comment
mlaique Expansionary Monetary Policy = lower interest rates

Another way to look at it:

Selling government securities:
1. Money supply decreases, demand for money increases therefore banks charge higher interest rate for lending.
2. On the other hand, as the central bank continues to sell securities, the interest they charge must rise each time for it to appeal to investors. Not getting into how the auction process works but essentially for the securities to be sold, the market will demand a higher rate.

Reserve Requirements:
1. Increasing reserve requirements will indirectly decrease money supply as banks will be hesitant to lend and if they do they will be able to charge a higher interest rate.
Horv Reserve requirement points to the money multiplier. Higher the reserve, the less a bank can lend out, thus decreasing the money multiplier.
pigletin expansion means more money in market and more cheaper the money becomes. rising reserve rate will create less money
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