Question

In: Economics

1. If the money multiplier is 5, the sale of $3 billion of securities by the...

1. If the money multiplier is 5, the sale of $3 billion of securities by the Fed on the open market causes a

	a.	$5 billion decrease in the money supply.
	b.	$5 billion increase in the money supply.
	c.	$15 billion increase in the money supply.
	d.	$15 billion decrease in the money supply.

2.

If nominal wages cannot be cut, then the only way to restore the labor market equilibrium following a decrease in the labor demand is by:

	a.	unions.
	b.	productivity decreases.
	c.	legislation.
	d.	adjustments via inflation.

3.

Which one of the following policy tools could be adopted by the Fed to reduce the money supply?

	a.	An increase in the interest rate paid on reserves.
	b.	A decrease in the discount rate
	c.	A decrease in the reserve requirement
	d.	An open market purchase of bonds by the Fed

Expert Solution

1 - Option D

$ 15 billion decrease in money supply.

Total decrease = Sale value * money multiplier

= 5*3

= $ 15 billion

Purchasing of securities increases money supply and not decreases it. Hence Option D will be correct.

2 - Option D

Adjustments via inflation

The demand for labor will rise in this phase.

3 - Option A

Increase in interest rate paid on reserves

This will allow banks to have more money with fed and lesser money with themselves. Other options are of expansion and not contraction. Hence A will be correct.

Rahul Sunny answered 2 years ago

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