Which action by a central bank is considered expansionary?

The action that is considered expansionary is the central bank purchasing government bonds. When a central bank buys government securities, it injects liquidity into the financial system, increasing the money supply. This process is part of open market operations, which are a tool used to manage economic activity. By purchasing bonds, the central bank pays the sellers, which adds to the reserves of the banks, encouraging them to lend more. This increased lending can stimulate economic growth by promoting spending and investment among consumers and businesses.

In contrast, increasing the policy rate would lead to a contraction in monetary policy, making borrowing more expensive. Similarly, raising the reserve requirement restricts the amount of funds banks can lend, also leading to a contractionary effect. Reducing the money supply directly limits the amount of money available in the economy, further tightening financial conditions. Therefore, the purchase of government bonds stands out as a clear expansionary measure aimed at promoting economic growth.