Question

If the Fed wants to increase the money supply, it will _____ Treasury securities.

Question 17 options:

	a) issue
	b) buy
	c) sell
	d) hold

When the Fed wants to change the money supply, it usually buys or sells money market mutual funds.

Question 18 options:

	a) True
	b) False

The Federal Reserve is the:

Question 19 options:

	a) federal government's bank, central bank, and banker's bank in the United States.
	b) federal government's bank.
	c) U.S. central bank.
	d) banker's bank in the United States.

An increase in the growth rate of the money supply raises both real growth and inflation in the long run.

Question 20 options:

	a) True
	b) False

The extra lending by the Fed during the 2007–2009 recession was done primarily to:

Question 21 options:

	a) lower interest rates.
	b) restore liquidity to credit markets.
	c) increase the money supply.
	d) restore confidence in the banking system.

If the Fed wants to decrease the money supply, it will:

Question 22 options:

	a) increase the rate of interest paid on reserves.
	b) lend money to banks.
	c) decrease the reserve ratio.
	d) buy government bonds.

The Fed lends to banks:

Question 23 options:

	a) as an attempt to limit the number of new loans extended by banks.
	b) on a regular basis as a way to increase the money supply.
	c) as a way of earning profits, which in turn are passed on to the federal government.
	d) only in dire emergencies to avoid insolvency.

Answer 1

17. The correct answer is (b) buy. This is because if the Fed wants to increase its money supply, it should buy back the treasury securities from the commercial banks so that they create more money in the economy and increase the money supply.

18. The given statement is false. When the government wants to change the money supply, it buys or sells government securities on behalf of the government.

19. The correct answer is (a). Federal reserve is the federal government's banks, the central bank and banker's bank in the United States. This is because Federal Reserve is the Central bank in the United States. Commercial banks can park their surplus funds with Fed and also borrow from it. Thus, it is also bankers' bank. Fed also acts on behalf of the government when it sells or buys in Open Market operations.

20. The given statement is true. The growth of money supply will raise the output in the short run leading to real growth rate. However, in the long run, increase in money supply just causes inflation.