1) The Federal Reserve has developed powerful policy tools allowing them to effe
ID: 1121350 • Letter: 1
Question
1) The Federal Reserve has developed powerful policy tools allowing them to effectively eliminate business cycles and achieve absolute price stability a True b) False 2) When the Federal Reserve conducts open market purchases to correct an output gap, the unemployment rate increases, ceteris paribus. a) True b) False 3) Accordingto the money demand and supply model, an open market sale of Treasury securities by the Federal Reserve would cause the equilibrium interest rate to a) decrease. b) increase. c) not change d) decrease if the economy is in a recession. Interest rate, i 4% MD 900 950 Quantity of money billions ot dollars) 4) In the figure above, themovement from point B to point A in the money market would be caused by a) a decrease in the required reserve ratio by the Federal Reserve b) an increase in the price level c) an open market sale of Treasury securities by the Federal Reserve d) a decrease in real GDPExplanation / Answer
1) The answer is TRUE.
2) The answer is FALSE. - becasue when fed conducts open market purchase, the money supply increase , new business creates and unemployment rate decreases.
3) THe answer is B -) Increase - becasue, an open market sale would decrease the money supply from the economy, as a result the bank have less money in thier excess reserves and thus the interest rate will increase.
4) THe answer is A -) a decrease in the required reserve ratio by the Federal Reserve.
because, by decrease in the required reserve ratio, the multiplier will increase and hence the money supply will increase in the economy and as a result the interest rate will fall.
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