25. (2 points) Jonny is risk averse. Jonny is given three options: • $50 for cer

Question

25. (2 points) Jonny is risk averse. Jonny is given three options: • $50 for certain • Gamble A: $100 with probability 0.5 and $0 with probability 0.5 • Gamble B: $200 with probability 0.25 and $0 with probability 0.5 Jonny chooses A. Gamble A B. Gamble A or B, but not the $50 C. Gamble B D. $50 for certain E. he is indifferent between all three options 26. (2 points) In response to a one percentage point decrease in yield to maturity, A. the price of short-term securities fall by a greater percentage than the price of long-term securities. B. the price of short-term securities rise by a greater percentage than the price of long-term securities. C. the price of short-term securities fall by a lower percentage than the price of long-term securities. D. the price of short-term securities rise by a lower percentage than the price of long-term securities. 27. (4 points) Write down all the ways the Federal Reserve could use its tools to increase in the money supply.

Explanation / Answer

Jonny being risk averse chooses the option with certain outcome of $50 i.e, D.

In response to a one percentage point decrease in yield to maturity, the price of short-term securities rise by a lower percentage than the price of long-term securities.

Federal Reserve could use the below tools to increase the money supply.

i. Lower the Statutory Liquidity Ratio - SLR

ii. Purchase treasury bonds from the open market.

iii. Decrease general interest rates on lending

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