Question

1) The Federal Reserve through massive purchases of U. S. government bonds now owns over 25% of this debt.

True

False

2) The three largest components of GDP are Consumption, Government spending and Investments.

True

False

3) If the Federal Reserve decreases the reserve requirement  this will increase the money multiplier and this would probably occur to stimulate the economy.

True

False

4) The yield curve is usually upward sloping and if the yield curve is downward sloping it often predicts a coming recession.

True

False

Answer 1

1. False. The Federal Reserve goes with the aim of buying as many bonds as required to keep the market steady. It owns 24% of the debt.

2. True. Gross Domestic Product is the monetary value of the finished goods and services produced in a given period of time. The three largest components of GDP are consumption, government spending and investments. Consumption is the consumer spending and it is the largest component of the GDP for countries like the US. Investments are made by businesses to be able to carry out production activities. Modern governments are spending as a means of enhancing growth of the economy.

3. True. When the Federal Reserve decreases reserve requirement, it will increase the money multiplier. It is seen that the multiplier size is usually determined by the size of the reserves. When the reserve requirements are reduced, the banks can lend out more funds, the money multiplier increases, ultimately leading to an increase in the money supply which will help stimulate the economy.

4. True. They yield curve is upward sloping normally and this means that short term debt instruments yield lower interests when compared to long term debt instruments. However, a downward sloping yield curve suggests that the economy may be headed towards a recession. When the yield curve is downward sloping, people expect interest rates in the future to be low.