Which of the following methods would the Fed use to \"maintain market confidence

Question

Which of the following methods would the Fed use to "maintain market confidence" when a negative AD shock hits?
i. Slow the growth rate of the monetary base.
ii. Raise the interest rate on discount window loans.
iii. Promise to increase the growth rate of money if the economy worsens further.
iv. Sell Treasury bills and buy bank reserves through open market operations.
v. Pay a higher interest rate on reserves. i and ii iii and iv v iii Which of the following methods would the Fed use to "maintain market confidence" when a negative AD shock hits?
i. Slow the growth rate of the monetary base.
ii. Raise the interest rate on discount window loans.
iii. Promise to increase the growth rate of money if the economy worsens further.
iv. Sell Treasury bills and buy bank reserves through open market operations.
v. Pay a higher interest rate on reserves. i and ii iii and iv v iii

Explanation / Answer

i) Slowing down the growth rate of monetary Base harms the confidence even more.

ii) Raising the interest rate in the discount window loans(discount rate) limits the amount banks can lend out even more and tighten the money supply which harms market confidence.

iii) Promise to increase the growth rate of money if the economy worsens further helps to restore market confidence because it doesn't tighten money supply unlike option i), ii), iv) and v).

iv) Selling Treasury bills and buying bank reserve through open market operations decrease the money in public's hand and this further worsen their confidence.

v) Paying a higher interest rate on reserve held at the fed will decrease the money supply and worsen market confidence.

Answer- option (iii)

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