Question

Financial contagion may results in lost integrity in the entire financial system. To prevent this from happening, the Fed may

Select one:

a. consult with private deposit insurance programs to cover the losses of insolvent banks.

b. forgive banks liabilities.

c. act as the lender of last resort to decrease the money supply.

d. act as the lender of last resort to make short-term emergency loans, as needed.

How do central bank policies affect interest rates?

Select one:

a. When the central bank decides to decrease the discount rate, then other interest rates increase.

b. When the central bank decides to increase the discount rate, then other interest rates increase.

c. When the central bank decides to increase the discount rate, interest rates will initially increase, and then decrease in the long run.

d. When the central bank decides to increase the discount rate, its member banks will borrow more from the central bank.

How does monetary policy affect the market?

Select one:

a. Monetary policy has a direct impact on aggregate demand.
b. Monetary policy has an indirect impact on aggregate demand.

c. Monetary policy has a more of an impact on government spending than investment.

d. Monetary policy has a more of an impact on consumption than investment.

If the central bank raises the reserve requirement on deposits

Select one:

a. the money supply decreases and interest rates increase.

b. the money supply increases and interest rates decrease.

c. the money supply and interest rates increase.

d. the money supply and interest rates decrease.

An open market operation decreases the money supply when the Federal Reserve

Select one:

a. buys bonds from banks, which increases bank reserves.

b. sells bonds to banks, which increases bank reserves.

c. sells bonds to banks, which decreases bank reserves.

d. buys bonds from banks, which decreases bank reserves.

An open market purchase of US Treasury bonds by the central bank will ________ credit conditions for private firms.

Select one:

a. restrict

b. cause a government budget deficit.

c. ease

d. not change

Answer 1

2. The correct answer is b. When the central bank decides to increase the discount rate, than other interest rate increase.

Reason = discount rate is the rate of interest which a central bank charges on its loan to a commercial bank. So when central bank increases the discount rate, then the interest rate charges by commercial bank is also Increases.

3. The correct answer is b. Monetary policy has an indirect impact on aggregate Demand.

Monetary policy impact the money supply in the economy, it also influence the interest rate and inflation rate all these indirectly impact the aggregate Demand.

4. The correct answer is a) the money supply decreases and interest rate increase.

Reason

When the reserve requirement ratio increases the bank able to generate lower credit/loan due to which money supply decreases and interest rate increases.

5. The correct answer is b. Sell bonds to bank, which increase bank reserve.

Because sale of security and bonds by central bank reduces the reserve of commercial banks. It adversely affects the bank's ability to create and therefore decrease the money supply in the economy.

6. The correct answer is c. Ease

Because purchase of securities by central bank increases the reserve and raises the bank's ability to give credit.