Question

If the Fed wants to lower interest rates it will:

A) Buy bonds

B) Sell bonds

C) Contract the money supply

D) Lower unemployment

2) The Fed may lower interest rates for all of the following reasons, except:

A) Because they are contracting the money supply.

B) Because they are practicing expansionary policy.

C) Because the economy has entered a recession.

D) To encourage growth in private-sector investment.

3) The unemployment rate and GDP growth rate tend to be inversely related.

A) True

B) False

4) Borrowers tend to be hurt the most by inflation.

A) True

B) False

Answer 1

If the Fed wants to lower interest rates, it will increase money supply and money supply can be increased with the purchasing the bonds.

Hence option A is the correct answer.

2.

If the Fed wants to lower interest rates, it will increase money supply and money supply can be increased with the purchasing the bonds and vice-versa.

Hence it can be said that if the Fed may lower interest rates for all of the following reasons, except because they are contracting the money supply.

Hence option A is the correct answer.

3.

Since economic growth means an increase in the production of output in the economy compare to previous time period. The economic growth it is possible through more investment in the capital stock. So when capital investment increases, then production of goods and services increases, so the real GDP increases. With the increase in the production the employment increases and unemployment decreases. It means there is an inverse relationship between unemployment rate and GDP growth rate.

Hence the given statement is true.

Hence option A is the correct answer.

4.

Borrowers tend to be hurt the most by inflation. This is not correct because with inflation real interest rate for borrower decreases. Hence borrower is better off.

Hence it is false.

Hence option B is the correct answer.