The Federal Reserve Board wishes to stimulate a sluggish economy, it would do so by doing which of the following?

• A. Selling U.S. Government securities in the open market & Raising reserve requirements & Reducing margin requirements.
• B. Buying U.S. Government securities in the open market & Lowering reserve requirements & Reducing margin requirements.
• C. Selling U.S. Government securities in the open market & Lowering reserve requirements & Increasing margin requirements.
• D. Buying U.S. Government securities in the open market & Raising reserve requirements & Increasing margin requirements.

Answer: (B)

Expansionary monetary policy uses actions that put more money into the economy and make borrowing easier. Buying U.S. Government securities in the open market increases bank reserves, which expands the money supply and tends to lower interest rates, encouraging lending and investment. Lowering reserve requirements lets banks hold less cash relative to their deposits, freeing up funds to loan out more, further boosting money supply and credit creation. Reducing margin requirements makes it cheaper and easier to borrow to buy assets like stocks, increasing consumer and business borrowing and spending.

The other approaches would tighten conditions: selling securities pulls money out of circulation; raising reserve requirements and increasing margin requirements make borrowing harder and slow spending.