Question

The intended effects on the economy of a Fed EXPANSIONARY (stimulative) policy are

Select one:

A. to fight off possible inflation.

B. lower interest rates which encourage investment and consumption to increase real GDP.

C. higher interest rates to encourage investment.

D. a more equitable distribution of money and income.

Which is NOT a desirable feature of a central bank according to chapter 16?

Select one:

A. transparency

B. independence from political influence

C. direct control by the federal government

D. decision-making by committee

Answer 1

1. The correct answer is lower interest rates which encourages investment and consumption to increase real GDP.

This is because an expansionary monetary policy is meant to increase the money supply. It can be achieved only by lowering interest rates.

The raising of interest rates will only contract the money sypply.

Also, expansionary monetary policy is likely to cause inflation.

Monetary policy is not concerned with any kind of redistribution policies. Hence, it does not cause equutable distribution.

2. The correct answer is direct control by the federal government. This is not a desirable feature of the central bank. This is because if the central bank is directly controlled by the federal government, we cannot expect it to frame policies that will be in accordance with the situation of the economy. The policies will become biased in favor of the political gains of the government in power.

The other options are incorrect because transparency, independence from the political government and decision making is what is required to frame good policies in favor of the economy.