26) The national debt is a cumulative m easure of all past government deficits a

Question

26) The national debt is a cumulative m easure of all past government deficits and surpluses, while the federal budget is an annual measure of government tax revenues and expenditures a True b) False 27) When the Federal Reserve conducts open market transactions, it a) b) c) d) buys or sells previously issued government bonds. buys or sells corporate bonds in the bond market issues government bonds to raise funds for the government makes credit available to financial institutions in crises. 28) Decreasing the discount rate is a) b) c) d) an expansionary policy stance because consumers and businesses can now borrow funds directly from the Fed at a lower cost, thereby encouraging private spending a contractionary policy stance because the cost of borrowing funds falls, thereby encouraging consumption and investment spending an expan sionary policy stance because it will be less costly for banks to borrow funds and this puts downward pressure on interest rates in the economy a contractionary policy because it reduces banks' profit margins by lowering thereturn on lending 29) In late 2008, the U.S. Congress voted to extend unemployment insurance benefits for seven additional weeks in recognition of the growing unemployment problem. This extension is an example of a) contractionary fiscal policy b) expansionary monetary policy c) automatic fiscal policy d) discretionary fiscal policy 30) According to the money market, a decrease in interest rates is likely to cause a) b) c) d) the money demand curve to shift to the left. the money demand curve to shift to the right firms and households to increase the quantity of money demanded firms and households to decrease the quantity of money demanded

Explanation / Answer

26) False

National debt is the total amount of money which a government of country borrowed.

27) a) buy or sells previously issued government bonds.

Open market operation is the sale and purchase of government securities by the Fed to affect the supply of money in the economy.

28) c) an expansionary policy stance because it will be less costly for banks to borrow funds and this puts downward pressure on interest rates in the economy.

Discount rate is the rate set by the Federal Reserve for lending to other banks. Banks lend their money to other bank by charging discount rate. When discount rate decreases then lending among banks increases which increases money supply in the economy. So, it is expansionary.

30) b) money demand curve to shift to the right.

Decrease in interest rate increases investment by firms, so Investment component of AD increases which shifts AD curve rightwards.

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