Which one of these events is MOST likely to raise interest rates in the economy?

Question

Which one of these events is MOST likely to raise interest rates in the economy? a. The Fed buying government bonds through an Open Market Operation b. Prices in the economy increasing due to a demand-pulled inflation c. The Fed lowering the Federal Funds Rate d. The Fed lowering the Discount Rate e. National income falling during a severe recession

Malik invests his money in an institution that purchases very risky yet potentially very profitable assets such as currency swaps and derivatives. What institution did Malik invest in?

Select one:

a. A Hedge Fund

b. Insurance Company

c. A Commercial Bank

d. A Credit Union

e. An Investment Bank

Suppose that in 2010 the government collected $300 billion in revenue and spent $370 billion, while in 2011 the government revenue increased to $360 billion and its spending fell to $340 billion. If the government did not have any debt at the beginning of 2010, how much debt would it have by the end of 2011?

Select one:

a. $20 billion

b. $30 billion

c. $50 billion

d. $60 billion

e. $70 billion

Which one of these policies should the Fed engage in if unemployment is 9% and inflation is 1.5%?

Select one:

a. Issue new government bonds and increase government borrowing

b. Sell government bonds through an Open Market Operation

c. Increase discretionary government spending

d. Raise the Required Reserves Ratio

e. Target a lower Federal Funds Rate

Explanation / Answer

Question 1

The event that most likely to raise interest rates in the economy is the increase in prices in the economy due to a demand-pull inflation.

This increase in price will increase the transaction demand for money as people will need more money to buy same set of goods and services leading to overall increase in demand for money.

Given the money supply, this increase in demand for money will raise the interest rate in the economy.

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

Question 2

Malik has invested his money in an institution that purchase very risky yet potentially very profitable assets such as currency swaps and derivatives.

It is the hedge funds that generally undertakes very risky investment that have potential of very high profits.

So, Malik has invested in a Hedge Fund.

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

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