Question

1) When it sells government bonds to decrease the money supply, the Fed is

A. conducting an open-market sale.

B. regulating a bank.

C. enacting fiscal policy.

D. conducting an open-market purchase.

2) When it buys government bonds to increase the money supply, the Fed is

A. enacting fiscal policy.

B. regulating a bank.

C. conducting an open-market purchase.

D. conducting an open-market sale.

3) If you want to measure and record economic value, you will primarily use which function of money?

A. money as a means of barter

B. money as a medium of exchange

C. money as a unit of account

D. money as a store of value

4) True or False: When the Fed purchases government bonds the money supply increases and the federal funds rate decreases.

True/False

5) Suppose the Fed purchases $50,000 worth of government bonds from the public. You know that eventually the money supply will

A. increase by more than $50,000.

B. increase by less than $50,000.

C. decrease by less than $50,000

D. increase by exactly $50,000.

Answer 1

1. Option A

• When fed wants to decrease the money supply in the Economy, it does an open market sale of its securities .
• This will further decrease the inflation and the amount of reserves held by the banks. The interest rates rise as a result of this action.

2. Option C

• When fed wants to increase the money supply in the money Economy, it does an open market purchase of securities.
• This will further increase the inflation and the amount of reserves held by the banks. The interest rates fall as a result of this action.

3. Option C

• Unit of account is an important function of money as it allows to measure the value of any commodity, good or a service in terms of its currency.
• It measures and records the value of any particular thing. Hence money is known as a unit of account.

4. The statement is true

• The fed uses Expansionary monetary policy to increase the money supply in the Economy by the purchase of government securities from open markets.
• When the money supply increases, the inflation rate increases, while the federal funds rate decreases.
• The federal funds rate is the interest rate charged by depository institutions for lending loans to other depository institutions.

5. Option A

• When the fed purchases $ 50,000 worth government bonds from the public, the public earn $50,000 .
• The customers then deposit this amount in their accounts in the bank which increases the amount of reserves held by the bank.
• The banks can then increasing the lending of loans which thus Increases the money supply more than $ 50,000.