2, The Vederal Funde Bate io te ate th s. banks eharge when they lend ote ks set

Question

2, The Vederal Funde Bate io te ate th s. banks eharge when they lend ote ks setves ennig b, the Federal Reseve e cmmeid nkes for ig 6 commereiad anks ehngs their eat elienns d. the federal govemment pays tos boerw ney 3. The data show that mongags ates, i es,and other inseres raies t affeet econmomie setivity a Move with the federal funds rale b, move in the opposite direetion from the federal fonds rate . move independently of the federal fund rate d, never change at all 34. The quantity theory of money implies that hyperinflation is caused by a. Rapid growth in the demand for money b. Too much production e. Growth in the supply of money that far exceeds the growths of geoduction d. Corporate greed 35. High inflation usually results when a. Price of oil goes up. b. Restaurants print new menus often. c. Governments cannot raise revenue through taxes or bomowing so they p currency to finance their purchases d. Any of the above happens. 36. Which of the following is NOT a cost of inflation? a. Because with high inflation firms adjust prices more frequendly, their costs f printing menus and catalogues are higher b. Because firms adjust prices at different times, with higher inflation relian prices fluctuate more, leading to a misallocation of productive resources. Inflation sometimes leads to counterproductive policies like price controls d. Inflation erodes the purchasing power of everyone's wages Suppose that a wave of credit card frauds motivates people to withdraw and hold m cash for their transactions. If the Fed does not act, the a. The federal funds rate will increase b. The supply of reserves will decrease c. The federal funds rate will decrease. d. The federal funds rate will stay the same sing the scenario from the previous question, if the Fed is targeting a specific Fed nds Rate, then they will need to a. Increase the supply or reserves through open market purchases. b. Increase the supply or reserves through open market sales c. Decrease the supply or reserves through open market purchases. d. Decrease the supply or reserves through open market sales

Explanation / Answer

32. B

33. A

34. C

35 C

36 B

37. C

38. A

Fed Fund rate is what banks charge each other for overnite lending to meet their balance requirements.When the Federal Open Market Committe wants to lower the rates, they purchase securities from their memebr banks thus giving them more reserves. It implies that banks need to lower the fed Fund rate to lend out to each other. In the opposite scenario, when fed wantes to increase the rates, it seels securities to banks thus lowering their reserves and increasing the Fed Fund rate.

A higher fed funds rate means banks are less able to borrow money to keep their reserves at the mandated level.That means they will lend less money out, and the money they do lend will be at a higher rate. That's because they are borrowing money at a higher fed funds rate to maintain their reserves. Since loans are harder to get and more expensive, businesses will be less likely to borrow. This will slow down the economy.

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