Monetary Policy

C is correct. When the Fed purchases Treasury securities (expansionary monetary policy), it injects money into the banking system, increasing money supply and putting downward pressure on interest rates. Lower interest rates increase the value of existing bonds (inverse relationship) and reduce borrowing costs for mortgages and other loans.

A is incorrect because it reverses the relationship. Fed purchases lower rates, not raise them. B is incorrect about bond values: when interest rates fall, existing bond prices rise (not fall) because their higher coupon rates become more valuable. D is incorrect because open market operations directly affect interest rates through money supply changes. this is the primary mechanism of monetary policy.

C is correct. Open market operations (the buying and selling of Treasury securities) is the Fed's most frequently used and most flexible monetary policy tool. The Federal Open Market Committee (FOMC) conducts these operations daily to fine-tune money supply and influence the federal funds rate.

A (discount rate) is used less frequently as it's more of a signaling tool and applies only to banks borrowing directly from the Fed. B (reserve requirements) is rarely changed because it's a blunt instrument with powerful effects across the entire banking system. D (margin requirements) is a regulatory tool for securities trading, not a primary monetary policy tool for controlling money supply.

B is correct. Calculate the change: Original reserves: $500 million × 0.08 = $40 million. New reserves required: $500 million × 0.10 = $50 million. Additional reserves needed: $50 million - $40 million = $10 million.

A ($5 million) incorrectly calculates just 1% of deposits ($500 million × 0.01) without considering the full 2 percentage point increase. C ($40 million) is the original reserve requirement amount, not the additional amount needed. D ($50 million) is the new total reserve requirement, not the additional amount beyond what was already required.

C is correct (the EXCEPT answer). Changing corporate tax rates is a fiscal policy tool controlled by Congress and the President, NOT a monetary policy tool. This is a critical distinction frequently tested on the Series 65 exam.

A is accurate: open market operations (buying/selling Treasury securities) is the Fed's primary monetary policy tool. B is accurate: the discount rate is one of the three main monetary policy tools controlled by the Federal Reserve Board. D is accurate: reserve requirements (the percentage of deposits banks must hold in reserve) is a monetary policy tool, though used infrequently due to its powerful systemic effects.

C is correct. Statements 2, 3, and 4 are accurate.

Statement 1 is FALSE: This is contractionary monetary policy, not expansionary. Selling securities and raising the discount rate both remove money from the system and increase borrowing costs.

Statement 2 is TRUE: Contractionary monetary policy (reducing money supply and raising rates) is typically used to combat inflation by slowing economic activity and cooling demand.

Statement 3 is TRUE: When the Fed sells Treasury securities, it removes money from the banking system, directly decreasing the money supply. Higher discount rates also discourage bank borrowing, further reducing money creation.

Statement 4 is TRUE: Both actions put upward pressure on interest rates. selling securities reduces money available for lending, and raising the discount rate increases the baseline cost of borrowing.