1. The most frequently used monetary device for achieving price stability is: Se

Question

1. The most frequently used monetary device for achieving price stability is:

Select one:

a. open-market operations.

b. taxes.

c. reserve ratio.  

d. discount rate.   

2. The major purpose of the Federal Reserve selling government securities in open market operations is to:

Select one:

a. make a profit  

b. lower interest rates

c. invest money for government spending

d. restrict banks’ ability to lend

3. Assume the required reserve ratio is 10%. If Federal Reserve buys $1 million in government securities from the public, the money supply will immediately _____ and the maximum money-lending potential of the banking system will ____.

Select one:

a. increase by $1 million, increase by $1 million

b. increase by $1 million, increase by $10 million

c. decrease by $1 million, decrease by 10 million

d. increase by $1 million, decrease by $1 million    

4. A television report states: "The Federal Reserve will lower the discount rate for the fourth time this year." This report indicates that the Federal Reserve is most likely trying to:

Select one:

a. improve the savings rate

b. save the banking industry

c. stimulate the economy

d. reduce the credit card interest rates

e. reduce inflation

Explanation / Answer

1) The most frequently used monetary device for price stability is Open market operations. It refers to buying and selling of government bonds by central bank to control the supply of money in the economy.

This method is popular because it is a flexible method as compared to others.

So answer is A ) Open market operations

2) By selling government bonds in open market operations , the main aim of the central bank is to decrease the money supply . When government bonds are sold and banks buy them , their ability to lend reduces as less funds are available to them. also a decrease in money supply by selling bonds will increase the interest rate.

So the answer is D). Reduce bank's ability to lend

3)By buying government securities from public , the central bank is increasing the money supply . Here the money supply will immediately increase by 1 million and the maximum money lending potential will be $ 10 million since the reserve ratio is 10%, so the money multiplier will be 1/0.1= 10

So answer is option B)

Increase by 1 million and increase by $ 10 million.

4) Discount rate refers to the rate at which central bank lends to commercial banks. A decrease in discount rate makes loans cheaply available to the commercial banks. So they are able to lend at low rates of interest to the public.

This leads to expansion in the economic activities as people are able to borrow more and so this leads stimulating of economy.

Hence option C ) Stimulate the economy is the answer

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