19. Bank regulations a) Are not necessary because the financial sector works mor

Question

19. Bank regulations

a) Are not necessary because the financial sector works more efficiently without government supervision.

b) Are designed partly to ensure the safety of depositors.

c) Are designed partly to minimize run on banks.

d) Are designed mainly to control the money supply.

e) b and c.

f) b,c,d.

20.  Which of the following is true?

a) FDIC is an agent of the federal government.

b) The federal government cannot limit the type of assets in which banks can invest in.

c) Deposit insurance limits the money supply.

d) a and b.

e) all of the above.

f) None of the above.

5. Which of the following is true?

a) To tackle inflation, the Fed buys treasury bills, thereby decreases the interest rate.

b) To tackle recession the Fed purchases treasury bills, thereby shifts the supply of treasury bills to the left.

c) To tackle inflation the Fed sells treasury bills, thereby decreases the interest rate.

d) None of the above.

5.1.  Contractionary monetary policy

a) Increases investment and aggregate demand.

b) Aims to decrease aggregate supply.

c) May include a reduction in the rate of required reserves.

d) Increases the money supply

e) None.

f) Both c and d.

Explanation / Answer

(19) (d)

Bank regulations are necessary to minimize the risk of bank runs, and to ensure bank customers the safety of their deposits.

(20) (d)

Option (c) is incorrect because deposit insurances help banks increase money supply, not limit it.

(5) (b)

To tackle recession, Fed wants to increase money supply by purchasing treasury bills, which reduces the supply of such bills in market, shifting the supply curve leftward, increasing the price of treasury bills which decreases interest rate, boosting investment and aggregate demand.

(5.1) (e)

A contractionary money supply is aimed at decreasing money supply, thereby increasing interest rate, lowering investment and aggregate demand. It is often done by increasing the required reserves ratio.

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