Question

Answer True or False.

A.1 Open market policy is an effective way of conducting monetary policy by the Central Bank.

A 2 According to liquidity preference theory, an increase in interest rates results in a reduction in the prices of securities resulting in speculators selling them and increasing the withholding of cash.

A.3 The money supply curve is completely inelastic due to the fact that it does not depend on income changes.

A 4 The increase in the money supply from the Central Bank has resulted in the shift of the LM curve to the right.

Answer 1

A1. True,

Reason = Open market operations refers to buying and selling of government securities by the Central Bank from/to the public and commercial banks. Sale of securities by central bank reduces the reserves of comercial banks. It adversely affects the bank's ability to create credit and therefore decrease the money supply in the economy.

purchase of securities by central bank increases the reserves and raises the bank's ability to give credit

A2. True.

Reason = There is inverse relationship between bond prices and interest rates, it means when interest rate increases then bond prices fall.

A3. True

Reason = When money supply curve is compeletely inelastic it means the money supply curve is vertical and parllel to y-axis. So it does not affect with the change in income because the total money supply in the economy is fixed.

A4. True

When Money supply increases the LM curve sfit rightward due to which the interest rate falls and output level increases.