3) Regulating the banking system is necessary a) Because the banking system dete
ID: 1156961 • Letter: 3
Question
3) 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.
4) 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.
5) 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.
6) Which of the following is correct?
a) The Fed can precisely target the money supply but not the interest rate.
b) The Fed can precisely target the interest rate but not the money supply.
c) The Fed can precisely target the money supply but not the supply of reserves.
d) The Fed can precisely target the supply of reserves but not the money supply.
e) b and d
Explanation / Answer
a) "A"
The banking system can affect the private system by increasing or decreasing the flow of money in the market. That is why it becomes necessary to manage the banks.
b) "D"
At the time of inflation, the Fed can sell the bonds to decrease the reserve in the banks and reduce the money supply in the economy.
c) "E"
The price of the bills and the return are inversely related. When the bills are cheaper the return will be higher and when the price of the bills increase the return decreases.
d) "A"
The money supply is in the hands of the reserve which they can increase or decrease based on the requirement of the economy. But the interest rates depend on the demand and supply of funds in the market.
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