Question

Lower reserves requirements, lead to a ________ in interest rates and a/an ________ in the money supply.

fall; increase

rise; decrease

fall; decrease

Which of the following actions by the Fed will increase the money supply?

increasing the reserve requirement and buying bonds.

lowering the reserve requirement and selling bonds.

lowering the discount rate and the selling bonds.

If the Central Bank observes aggregate demand weakening it will undertake

expansionary monetary policy.

contractionary monetary policy.

no action.

Considering how monetary policy affects the market, which of the following statements is most accurate?

There is a direct impact on aggregate demand by monetary policies.

There is an indirect impact on aggregate demand by monetary policies.

There is more of an impact on consumption than investments by monetary policies.

In order to ________ the money supply, government should ________ bonds in open market operations.

decrease; buy

increase; buy

increase; sell

When a Central Bank decides to make a policy intervention it must be mindful of the trade off between

inflation and interest rates.

inflation and unemployment.

money supply and inflation.

After 2008, the reasoning for the Fed to undertake quantitative easing was because ________.

the demand for loanable funds remained stagnant even as the federal funds rate was at historic lows.

the short-term interest rates were above zero and could be lowered.

the staggering unemployment was a greater threat than the threat of inflation.

When the supply of loanable funds shifts its position to the left, interest rates will ________ because loanable funds will be ________.

rise; more scare

rise; less scarce

fall; less scarce

Answer 1

Question 1

Lower reserve requirement creates additional excess reserves with the banks. This leads to increase in the supply of reserves which lowers interest rate and increase the lending by banks leading to money creation and an increase in the money supply.

So,

Lower reserve requirements, lead to a fall in interest rate and an increase in money supply.

Hence, the correct answer is the option (1) [Fall, Increase].

Question 2

Fed use the following measures to increase the money supply -

1. It decreases the reserve requirement.

2. It conducts open market purchase of government bonds.

3. It decreases the discount rate.

Hence, the correct answer is the option (1) [Decreasing the reserve requirement and buying bonds].

Question 3

Weakening aggregate demand indicate recessionary phase .

When economy is in recession, central bank tends to undertake the expansionary monetary policy to boost the aggregate demand leading to increase in the real GDP and eliminate the recession.

Hence, the correct answer is the option (1) [Expansionary monetary policy].

Question 4

Monetary policy impacts interest rates which in turn impacts cost of borrowing. This influences consumption spending and investment spending.

Change in these leads to change in the aggregate demand.

So, in a way, monetary policy indirectly impacts the aggregate demand.

Hence, the correct answer is the option (2) [There is an indirect impact on aggregate demand by monetary policies].