Question

The goals of the Federal Reserve are all the following except:

A,economic growth

B.maximize real output

C.high employment

D.stability of financial markets and institutions

E.price stability

What happens to the interest rate when the money supply increases?

A.remain constant

B.falls

C.rises

What happens to aggregate demand when the interest rate increases?

A.shifts to the right

B.remains constant

C.shifts to the left

If the money supply increases, the amount of economic investments made will decrease.

True

False

Increasing the required reserves ratio will increase:

A.interest rate

B.consumption

C.aggregate demand

D.money supply

Decreasing the discount rate will:

A.increase the real interest rate

B.increase the federal funds rate

C.increase the money supply

D.shift the aggregate demand curve to the left

In order to increase the money supply, the Fed could:

A.increase the required reserve ratio

B.increase the discount rate

C.sell securities

D.buy securities from the U.S economy

Changing the discount rate is also called:

A.open market operations

B.federal funds targeting

C.predatory banking

D.fiscal policy

Answer 1

Question 1

Federal Reserve conducts monetary policy with respect to a set of goals that it aims to achieve.

These goals are -

1. Economic growth

2. Maximize real output

3. High employment

4. Price stability

So,

Fed does not aim for achieving stability of financial markets and institutions.

Hence, the correct answer is the option (D).

Question 2

Increase in money supply shifts the money supply curve to the right.

Given the money demand curve, rightward shift of the money supply curve leads to fall in the interest rates.

Hence, the correct answer is the option (B).

Question 3

Increase in interest rates increases the cost of borrowing.

The increase in the cost of borrowing discourages households and businesses to borrow more for consumption and investment spending.

So, both of these will decline.

Decline in these two leads to decrease in aggregate demand.

So,

Aggregate demand shifts to the left when the interest rate increases.

Hence, the correct answer is the option (C).

Question 4

Increase in the money supply leads to fall in interest rate.

Fall in interest rates induces investment.

So, if the money supply increases, the amount of economic investments will made will increase.

The given statement is False.

Question 5

When the required reserve ratio increases, money supply decreases.

Given the demand for money, decrease in money supply leads to increase in interest rate.

Hence, the correct answer is the option (A).

Question 6

When discount rate decreases, banks borrow more reserves from Fed.

This translates into more loan being made by banks and thus money supply increases.

Hence, the correct answer is the option (C).

Question 7

For increasing money supply Fed could take following actions -

1. Lower the discount rate

2. Lower the required reserve ratio

3. Buy securities

Hence, the correct answer is the option (D).