QUESTION 10 Expansionary monetary policy … a. increases interest rates, raises investment spending, and lowers aggregate...

QUESTION 10

Expansionary monetary policy …

	a.	increases interest rates, raises investment spending, and lowers aggregate demand.
	b.	increases interest rates, decreases investment spending, and increases aggregate demand.
	c.	increases interest rates, decreases investment spending, and lowers aggregate demand.
	d.	lowers interest rates, raises investment spending, and raises aggregate demand.
	e.	lowers interest rates, decreases investment spending, and lowers aggregate demand.

The Fed can decrease the money supply by …

	a.	making an open market sale of bonds.
	b.	raising the required reserve ratio.
	c.	raising the discount rate.
	d.	making an open market purchase of bonds.
	e.	a., b., and c.

1 points

QUESTION 6

The federal funds rate is …

	a.	the interest rate for overnight interbank loans.
	b.	equal to the prime rate minus inflation.
	c.	the interest rate that the Fed charges to private banks.
	d.	determined in the private market for overnight loans of reserves among banks.
	e.	Both a., and d.

1 points

QUESTION 7

Imagine that the federal funds rate is above the target that the Fed had announced. In order to keep the actual rate as close as possible to the target rate, the Fed will …

	a.	make an open market purchase of bonds.
	b.	make an open market sale of bonds.
	c.	do nothing since the Fed cannot influence the federal funds rate.
	d.	set the federal funds rate by law.
	e.	None of the above

Solutions

Expert Solution

10. Option D. Lowers interest rates, raises investment spending, and raises aggregate demand.

Explanation: Expansionary monetary policy results in the higher money supply. Higher money supply leads to lower interest rate, which allows firms to borrow more and invest more. Also, lower interest rate allows households to consume more. So, the aggregate demand increases.

Next Question:

The Fed can decrease the money supply by …

Answer: e. a., b., and c.

Explanation: When the Fed sells bonds to banks, the money flow from banks to the Fed. This reduces the money supply. Also, an increase in the reserve requirement requires banks to hold more money as a reserve with the Fed. This reduces the money supply as well. Lastly, increasing the discount rate makes it costlier for banks to borrow from the Fed. This reduces the money supply too.

6. Answer: e. Both a., and d.

Explanation: The federal funds rate is the rate at which banks lend each other overnight to meet their reserve requirement. The rate is determined by the demand and supply of overnight loans for reserve requirements.

Rahul Sunny answered 1 year ago

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