SIE Securities Industry Essentials Practice Exam – Practice Test & Study Guide

Reserve requirements refer to the percentage of deposits that banks are required to keep on hand and not lend out. An increase in reserve requirements means that banks must keep more money in reserve, therefore taking money out of the money supply and decreasing the amount available for lending. This is a contractionary monetary policy action.

Option A Reducing interest rates is an expansionary monetary policy action, as it encourages borrowing and investing, leading to an increase in the money supply.

Option B: Buying government securities is also an expansionary monetary policy action, as it injects money into the economy and increases the money supply.

Option C: Decreasing the reserve requirements would also be an expansionary monetary policy action, as it allows banks to lend out more money and increases the money supply.