Question

1. The Federal Reserve holds deposits from

A) Consumers.

B) Banks.

C) The U.S. Treasury.

D) Large corporations.

2. If the Fed's objective is to stimulate the economy, which of the following gives the correct sequence of events?

A) The money supply increases, interest rates decrease, investment increases, and AD increases.

B) The money supply increases, interest rates decrease, investment increases, and AS decreases.

C) The money supply decreases, interest rates increase, investment decreases, and AD decreases.

D) The money supply decreases, interest rates increase, investment increases, and AD increases.

3. The value of the multiplier will be larger, the

A) Smaller the value of the marginal propensity to save.

B) Smaller the APC.

C) Larger the value of the MPS.

D) Smaller the APS.

4. The Board of Governors of FED consists of

A) 7 members, appointed for 14-year terms.

B) 26 members, appointed for 2-year terms.

C) 14 members, appointed for 7-year terms.

D) 50 members, appointed for 7-year terms.

Answer 1

1. Option B.

• The federal reserve is considered as the central bank of country.
• It is responsible for stimulating the economy by regulating the money supply and interest rates.
• It holds the deposits of banks and other depository institutions.

2. Option A.

• If Fed wishes to stimulate the economy it would use an expansionary monetary policy.
• An expansionary monetary policy involves increasing the money supply within the economy and decreasing the interest rates.
• This will increase the investment spending and the level of aggregate demand within the economy.

3. Option A.

• When the value of marginal propensity to save is smaller, the value of multiplier will be larger.
• We know that marginal propensity to save is the opposite of Marginal propensity to consume.
• If more money is used for consumption rather than Saving it, then the multiplier will naturally be large.

4. Option A.

• The board of governors are those members who are responsible for checking the proper functioning of Fed.
• It contains 7 members who are elected for 14 years time period.
• These members are elected by the President and get confirmed by the Senate.