Question Completion Status If the Federal Reserve wanted to stimulate the econom

Question

Question Completion Status If the Federal Reserve wanted to stimulate the economy, it would most likely: reduce the discount rate O increase reserves in the banking system decrease reserves in the banking system. Both A and C are true. QUESTION 17 The chairman of the Federal Reserve Board of Governors: Serves a four-year term and can be reappointed O Is elected by U.S. voters. O Is always closely tied to the same political party as the president. will typically change following each presidential election. QUESTION 18 Which of the following is not a basic monetary policy tool used by the Fed? O The reserve requirement O The sale and purchase of Treasury bonds O The discount rate Deposit insurance

Explanation / Answer

Ans.

16) D. both A and C are true

If fed wants to stimulate economy then it will reduce the discount rate and reduce the reserves by expansionary monetary policy.Reduction in reserves means banks are required to hold less cash in hand and increase amount of loans to its customers.This will increase money supply.On the other hand when Fed will reduce discount rate ,it increases excess reserves in commercial banks .Which increases money supply.Which ,leads to fall in interest rates and further increase investment which leads to economic growth.

17) A . serves a 4 year term and can be reappointed

The chairman of fed serves for four years and can be reappointed.He is representative of board of governors as well as manager of Board's staff.He is chosen by the president.

18) D. deposit insurance

The monetary policy used by Fed are discount rate,reserve requirement and open market operations. Open market operations are buying and selling of goverenment securities such as sale and purchase of treasury bonds.Reserve requirements are fraction of deposits that bank must maintain with federal reserve bank.Discount rtae is interest rate charged bt federal reserve banks to depository institutuions.Role of deposit insurance is to stabilize financial system during banks failures by making depositors assure that they will have immediate access to insured funds.But it is not used as monetary policy because it leads to problem of moral hazard.

19) C. are minimum amount of reserves bank is required to hold

Required reserves are minimum amount of reserves that commercial banks and depository institutions must hold .It is not used for lending or investment purposes.It is control mechanism to inject cash or withdraw from economy.

20) C. aggregate demand will shift right and unemployment rate willl fall

When Fed buys bonds there is increase in demand for bonds which leads to increase in money supply.Such that interest rate falls and investment increases which shifts aggregate demnad to right and thus decreases unemployment rate as well.

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