Question

4. Which of the following responses would an economist expect to result from an increase in interest rates?
(x) Thelma puts less money into savings accounts and bonds because a higher interest rate scares her since it is always an indication that the assets are more risky.
(y) Since the interest expense on any given loan increases as the interest rate increases, Beatrice decides to purchase a smaller home than she had initially planned because her monthly income is fixed.
(z) Ford Motor Co decides to delay a bond sale that would have raised the necessary funds to expand a factory because it is now more expensive to borrow.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (z) only
5. Which of the following statements is (are) correct?
(x) If the Fed targets the interest rate, it must reduce the money supply if the interest rate is above its target.
(y) In recent years, the Fed has conducted policy by setting a target for the federal funds rate.
(z) In recent years, the Fed has chosen to target interest rates rather than the money supply because the money supply is hard to measure with sufficient precision.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (z) only

Answer 1

Q4 D. (y) and (z) only

(x) False Higher interest rates make it more attractive to save in a deposit account because of the interest gained.

(y) and (z) True.With higher interest rates, interest payments on credit cards and loans are more expensive. Therefore this discourages people from borrowing and spending. People who already have loans will have less disposable income because they spend more on interest payments.Therefore the economy is likely to experience falls in consumption and investment.

Q5- D(y) and (z) only

(y)True. In recent years, the Federal Reserve has conducted policy by setting a target for the federal fund rate.

(z)True.In recent years, the Fed has chosen to target interest rates rather than the money supply because the money supply is hard to measure with sufficient precision.

In the short run, a decrease in the money supply causes interest rates to increase, and aggregate demand to shift left.

A decrease in money supply will increase interest rates not otherwise. Hence(x) false.