Social Sciences and History / Unit 14 SSH 1335 worked example, 60 to 90 seconds
Which Tool, Which Direction? Reading a Policy Move
The idea
The exam describes a central bank action and asks its tool and its direction, and the anchor's chapter sorts both. Tools, in the limited-reserves regime: open market operations, buying bonds to add reserves and lower rates, selling to drain them; reserve requirements, lowered to free reserves, raised to lock them; the discount rate, cut to encourage borrowing from the Fed, raised to discourage it. In the ample-reserves regime: the interest rate on reserve balances, lowered to push banks toward lending, raised to make holding reserves pay. Direction: any action that raises money and credit and lowers rates is expansionary, or loose; any that reduces them and raises rates is contractionary, or tight. The exam may ask the main tool; the traditional answer is open market operations, the anchor's current answer the interest rate on reserve balances.
In practice
Given "the Fed buys Treasury bonds", open market operations, expansionary. Given "the reserve requirement rises", contractionary. Given "the discount rate is cut", expansionary. Given "IORB is raised", contractionary, in the ample-reserves regime. Given "quantitative easing", purchases of long-term securities, expansionary. Ask two questions: what did the bank touch, and which way did money move.
Where people slip
The trap is the direction of a bond sale; selling bonds pulls reserves in, so it tightens. The second trap is the main-tool question, where the regime the question assumes decides the answer, and the course names both.
Your place on the trail
Every lesson rests on earlier ones and opens later ones. Tap any to jump.
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