Question

You just bought a big house and have plans to buy a bunch of furniture, top-notch appliances, and complete some extensive landscaping. The budget for these activities is significant, but you are in no hurry. You plan to retire in this house. As you are considering options, you read online that the Federal Reserve abruptly decided to sell a significant amount of government securities in the coming months. What is your most likely conclusion about this action?

a. The Fed predicts inflation and wants to slow the economy by decreasing money supply.

b. The Fed predicts deflation and wants to slow the economy by increasing money supply.

c. The Fed predicts deflation and wants to speed up the economy by decreasing money supply.

d. The Fed predicts inflation and wants to speed the economy by increasing money supply. You recently left your job at a nearby automobile manufacturing plant to start your own business supplying engine parts to the facility. While at the facility, you were a member of the company’s employee credit union, but closed your account upon leaving. Now you find yourself in need of a loan to start your business. In preparation for applying for a loan, you make a list of possible options. Which of the following institutions are options from which you should request a loan? a. A local finance company b. A local commercial bank c. A local brokerage firm d. The credit union where you were formerly a member A financial crisis just caused your FDIC-insured bank to close. You had $400,000 on deposit there, all in one account. You also had $300,000 on deposit in a non FDIC-insured money market account at another bank that did not close. How much money will you lose due to this bank failure? a. $400,000 b. $700,000 c. $0 d. $150,000 e. $300,000

Answer 1

ANSWER 1: a) The Fed predicts inflation and wants to slow the economy by decreasing the money supply.

The Fed uses open market operations to control the money supply. When it predicts inflation, it sells securities so that money is taken out from the economy and due to this the interest rates will rise and individuals and investors will resist borrowing and investing. They will invest their money in low-productive investments such as savings account and as a result, the inflation will slow down.

ANSWER 2: a) A local finance company

b) A local commercial bank

You can take a loan from the above two institutions. Since your account has been closed in the credit union, you cannot borrow from that source because you are no longer a member of that union.

ANSWER 3: d) $ 150,000

If a bank fails but it is FDIC insured then the money kept in such a bank is secure but only up to an amount of $250,000. Any amount beyond this limit remains uninsured. Thus, in this case, you will lose $ 150,000 ( 400,000 - 250,000 = 150,000). The other amount of $ 300,000 would not be lost since that bank didn't close.