1. When the Fed wants to raise the Federal funds rate, it: Select one: a. sells
ID: 1159482 • Letter: 1
Question
1. When the Fed wants to raise the Federal funds rate, it:
Select one:
a. sells bonds to banks and the public.
b. decreases the reserve ratio.
c. decreases the discount rate.
d. buys bonds from banks and the public.
2.Recent news: Federal Reserve raised the discount rate from 2.75% to 3%. This tightening of the monetary policy is most likely the Fed’s response to:
Select one:
a. problems in the banking industry
b. slow job growth
c. rising inflation
d. possible deflation
3. Assume the economy faces high unemployment but stable prices. Which combination of government policies is most likely to reduce unemployment?
Select one:
a. an increase in the reserve ratio and an increase in taxes
b. an increase in discount rate and a decrease in taxes
c. the purchase of government securities in the open market and an increase in government spending
d. the sale of government securities in the open market and a decrease in government spending
4.An increase in the money supply usually:
Select one:
a. decreases the interest rate and decreases aggregate demand.
b. increases the interest rate and increases aggregate demand.
c. decreases the interest rate and increases aggregate demand.
d. increases the interest rate and decreases aggregate demand.
Explanation / Answer
1.If the Fed sells bonds it reduces the money supply in the market.The money supply curve shifts to the left and interest rate rises
Answer-A.
2.The fed raises the discount rate generally to reduce money supply.One of the purposes behind reducing money supply is to tackle Inflation.Lower money supply reduces AD and the price level falls.
Answer-C
3.To reduce high unemployment the government should increase it's spending .
Answer-C
4.Increase in money supply shifts LM curve to the right reducing the interest rate and increasing output.Increase in output increases AD.
Answer-C
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