Question

146) Everything else remaining unchanged, what will happen if the Fed sells government bonds in the open market and borrowed reserves is zero?

146) A) It will cause both the equilibrium federal funds rate and equilibrium quantity of reserves to fall.

B) It will cause the equilibrium federal funds rate to fall, but no change in the equilibrium quantity of reserves.

C) It will cause the equilibrium federal funds rate to rise and the equilibrium quantity of reserves to fall.

D) It will cause the equilibrium federal funds rate to rise, but no change in the equilibrium quantity of reserves.

147) Everything else remaining unchanged, what will happen if the Fed buys government bonds in the open market and borrowed reserves is zero?

147) A) It will cause the equilibrium federal funds rate to fall, but no change in the equilibrium quantity of reserves.

B) It will cause the equilibrium federal funds rate to rise, but no change in the equilibrium quantity of reserves.

C) It will cause the equilibrium federal funds rate to fall and the equilibrium quantity of reserves to increase.

D) It will cause both the equilibrium federal funds rate and equilibrium quantity of reserves to fall.

148) If there is a change in the federal funds rate from a target rate due to an increase in the demand for reserves, the Fed can maintain the target by:

148) A) causing the supply curve of reserves to shift to the right. B) causing an upward movement along the supply of reserves curve. C) causing the supply curve of reserves to shift to the left. D) causing a downward movement along the supply of reserves curve.

149) If there is a change in the federal funds rate from a target rate due to a decrease in the demand for reserves, the Fed can maintain the target by:

149) A) causing a downward movement along the supply of reserves curve. B) causing an upward movement along the supply of reserves curve. C) causing the supply curve of reserves to shift to the right. D) causing the supply curve of reserves to shift to the left.

150) If the nominal interest rate in an economy is 8% and the real interest rate is 4%, the inflation in the economy is:

150) A) 8%. B) 12%. C) 32%. D) 4%.

Answer 1

Answer 146:

Reserve is the amount (in % of deposits) requirement that Bank needs to maintain with Fed and cannot lend to borrowers. In case of any changes in the Reserve quantity due to sudden withdrawals of depositors Banks take loans from Fed or other banks at a interest rate. This interest rate is called Federal Funds Rate.

In case when Fed is selling Bonds. Selling Bonds means Banks will need money to buy these Bonds and they will use reserves to buy the Bonds hence the Equilibrium quantity of Reserves will fall down. But amount of Reserves is to be maintained hence Banks will try to borrow from other banks/fed to fund the reserves this will increase the demand for money and hence the fed fund rate will increase.

Hence option C is Correct

Answer 147:

In case when Fed is buying Bonds. Buying Bonds means Banks will have more money as they have sold their Bonds and hence the Equilibrium quantity of Reserves will rise and they will have excess reserves. But keeping excess reserves is a loss to Banks hence Banks will decrease the fed funds rate to attract more borrowers and hence the fed funds rate will decrease.

Hence Option C is Correct.

Answer 148

If Demand for Reserves have increased means demand for money has increased. Hence Banks will increase the fed funds rate. So Fed Fund Rate will increase from the Target Rate. As shown in graph that Demand has increased from D-D` to D<sub>S</sub>-D<sub>S</sub>` and i* has increased to i_s*. To counter the effect we need to shift the supply curve to right as shown such that the new curve intersect at i* point with D_S-D_S` as shown. New supply curve is S<sub>S</sub>-S<sub>S</sub>`.

Hence option A is correct

Answer 149

If Demand for Reserves have decreased means demand for money has decreased. Hence Banks will decrease the fed funds rate. So Fed Fund Rate will decrease from the Target Rate. As shown in graph that Demand has decreased from D-D` to D<sub>S</sub>-D<sub>S</sub>` and i* has decreased to i_s*. To counter the effect we need to shift the supply curve to left as shown such that the new curve intersect at i* point with D_S-D_S` as shown. New supply curve is S<sub>S</sub>-S<sub>S</sub>`.

Hence option D is correct.

Answer 150:

Nominal Interest Rate = Real interest rate + Inflation Rate

hence, 8% = 4% + Inflation Rate

or, Inflation Rate = 8%-4% = 4%

Hence option D is correct