1.Inflationary pressure is a growing problem for the economy. Therefore, the Fed
ID: 1159483 • Letter: 1
Question
1.Inflationary pressure is a growing problem for the economy. Therefore, the Federal Reserve decides to pursue a policy to reduce the inflationary pressure. Which policy changes by the Fed would reinforce each other to achieve that objective?
Select one:
a. selling government securities and raising the discount rate
b. selling government securities and lowering the discount rate
c. buying government securities and lowering the reserve ratio
d. buying government securities and raising the reserve ratio
2.What is one of the advantages of monetary policy over fiscal policy?
Select one:
a. the quickness with which it can be used
b. its control over the size of Federal budget deficits
c. its domination of major sectors of the economy
d. the opportunity for broad political influence
Explanation / Answer
Answer:
1. Option (a) is correct. Selling government securities to the banks will suck the liquidity out of economy. The commercial banks lending will get reduced by the same amount so people will not be able to get more cash. This is a contractionary policy.
The discount rate is the interest rate Reserve Banks charge commercial banks for short-term loans. Higher discount rates will affect other interest rates. Higher rates discourages operations like lending or spending. It is contractionary in nature.
The above measure will reduce inflationary pressures.
2. Option (a) is more likely to be correct. Monetary policy can be implemented more quickly than the government's decision in case of fiscal policy. Option (b) is incorrect since control over budget deficit lies in the hands of government and fiscal policy is suitable for that. Option (c) and (d) may not be always true.
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