1) Which of the following is an example of contractionary monetary policy? a) In
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Question
1) Which of the following is an example of contractionary monetary policy?
a) Increasing capital gains taxes.
b) Decreasing the budget for national defense.
c) Buying treasury bills.
d) a and b.
e) None of the above.
2) The money multiplier
a) Cannot be precisely determined because private banks may choose to keep more reserves than what is mandatory by the rate of required reserves.
b) Cannot be precisely determined because private banks may choose to keep less reserves than what is mandatory by the rate of required reserves.
c) Can be precisely determined because the Fed can precisely target the interest rate.
d) None of the above.
3) Which of the following is an example of contractionary monetary policy?
a) An increase in the rate of required reserves.
b) Buying treasury bills.
c) Selling treasury bills.
d) a, c.
e) a, b.
4) Which of the following is true?
a) To tackle recession, the Fed buys treasury bills, thereby increases the money supply.
b) To tackle recession the Fed purchases treasury bills, thereby increases the reserves.
c) To tackle inflation the Fed buys treasury bills, thereby decreases the interest rate.
d) a and b.
e) a, b, c.
4.1) Which of the following is true?
a) The money multiplier is easily calculated by the Fed.
b) Monetary policy is usually not successful because the government cannot control its expenditures.
c) Monetary policy can no longer fix the economy because the Fed cannot precisely calculate the money multiplier.
d) None of the above.
Explanation / Answer
1. d. None of the above.
The contractionary monetary policy involves the action of selling securities, increasing the reserve ratios and increasing the bank rate.
Increasing the capital gain tax and decreasing the budget are examples of fiscal policy and it is not related to the monetary policy. The monetary policy is the policy of the central bank in a country.
2. a) Cannot be precisely determined because private banks may choose to keep more reserves than what is mandatory by the rate of required reserves.
The commercial banks usually lends out of their excess reserves so if they keep the more excess reserves the lending will be less so in the situation if the central banks tries to control the it will be ineffective. So the money multiplier cannot be precisely determined.
3. d.) a,c
A contractionary monetary policy is intended to decrease the money supply in the economy. If the central bank increases the reserve ratio, the commercial banks have to keep more of their deposits as reserves so this reduce the lending of bank and eventually money supply decrease.
When the central bank sells the security and it sucks the money supply in the economy and decrease the monetary base of the country.
4. a. To tackle recession, the Fed buys treasury bills, thereby increases the money supply.
To tackle the inflation the Fed must increase the money supply in the country so the buying securities by the Fed actually increases the money supply in the economy. The Fed cannot control the reserve requirement by purchasing the bonds.
5. c). Monetary policy can no longer fix the economy because the Fed cannot precisely calculate the money multiplier.
This is because of private banks may choose to keep more reserves than what is mandatory by the rate of required reserves.
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