1. Which of the following is true? a) To tackle inflation, the Fed sells treasur
ID: 1155624 • 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.
2. 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.
Explanation / Answer
1) To tackle inflation FED should decrease money supply by taking contractionary monetary policy. By selling treasury bills FED can withdraw money from the economy. Option a is correct.
2) FFR is the rate at which banks lend reserve balance to other banks on the overnight basis. When FFR is high FED takes contractionary policy. Them the price of treasury bills become low so investors try to buy more bills. option a is correct
At the time of high inflation, the price of bills decreases because investors sell treasury bills. Option c is also correct.
Therefore option e is correct.
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