1) Which of the following is true? a) To tackle inflation, the Fed sells treasur
ID: 1153873 • Letter: 1
Question
1) Which of the following is true?
a) To tackle inflation, the Fed sells treasury bills, thereby decreases the money supply.
b) To tackle inflation the Fed purchases treasury bills, thereby decreases the money supply.
c) To tackle inflation the Fed sells treasury bills, thereby increases the supply of Treasury bills.
d) None of the above.
e) a and c.
1.1) Which of the following is true?
a) The negative relationship between the FFR and the price of treasury bills is a result of a change in the demand of treasury bills.
b) The price of treasury bills is likely to increase in the time of inflation because the Fed increases the demand of treasury bills.
c) The price of treasury bills is likely to decrease in the time of inflation as a result of an increase in the supply of treasury bills.
d) a and b.
e) a and c.
2) Regulating the banking system is necessary
a) Because the banking system determines the money supply and money supply affects private investment.
b) To make sure that fiscal policy is not influenced mainly by profit minded banks.
c) b and a.
d) None of the above.
3) Open market operations in the time of inflation
a) Refers to selling treasury bills in order to decrease interest rate.
b) Refers to buying treasury bills in order to increase money supply
c) Refers to buying treasury bills in order to decrease the interest rate.
d) Refers to selling treasury bills in order to decrease the supply of reserves.
e) None.
4) There is a negative relationship between the interest rate and the price of treasury bills because
a) When treasury bills become more expensive, the effective return to their holders increases.
b) When treasury bills become more expensive, the effective return to their holders decreases.
c) When treasury bills become cheaper, the effective return to their holders increases.
d) When treasury bills become cheaper, the effective return to their holders decreases.
e) b and c.
Explanation / Answer
a) To tackle inflation the FED sells the treasury bills and take the money in return. This reduces the money present in the market and reduces the inflation. The answer is "A".
b) At the time of inflation, the FED floats the treasury bond at the time of inflation, the increased supply of the bills will reduce the price of those bills. The answer is "C".
c) Regulating the banking system is necessary because it affects the money supply which can affect the private investment level in the economy. The answer is "A".
d) It refers to selling the treasury bills and taking the money in return and it increases the interest rates and decreases the reserves in the economy. The answer is "D".
e) The correct statements are "B and C", The answer is "E".
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