1) Which of the following is true? a) To tackle inflation, the Fed buys treasury
ID: 1154012 • Letter: 1
Question
1) Which of the following is true?
a) To tackle inflation, the Fed buys treasury bills, thereby decreases the interest rate.
b) To tackle recession the Fed purchases treasury bills, thereby shifts the supply of treasury bills to the left.
c) To tackle inflation the Fed sells treasury bills, thereby decreases the interest rate.
d) None of the above.
1.1) Which of the following is true?
a) The negative relationship between the FFR and the price of treasury bills is a result of a change in the supply of treasury bills.
b) The price of treasury bills is likely to increase in the time of recession because the Fed increases the demand of treasury bills.
c) The price of treasury bills is likely to decrease in the time of recession as a result of a decrease in the Federal Funds Rate.
d) a and b.
e) a and c.
2) Contractionary monetary policy
a) Increases investment and aggregate demand.
b) Aims to decrease aggregate supply.
c) May include a reduction in the rate of required reserves.
d) Increases the money supply
e) None.
f) Both c and d.
2.2) Contractionary fiscal policy
a) Decreases interest rate and aggregate demand.
b) Aims to decrease the money supply.
c) Includes a reduction in the rate of required reserves.
d) Includes a reduction in taxes.
e) a and d.
f) All of the above.
3) Regulating the banking system is necessary
a) Because the banking system tends to shift the aggregate supply continuously to the right.
b) Because the banking system determines the money supply and money supply affects aggregate demand.
c) To minimize run on banks.
d) b and c.
e) All of the above.
4) Open market operations in the time of recession
a) Refers to selling treasury bills in order to increase interest rate.
b) Refers to buying treasury bills in order to decrease money supply
c) Refers to buying treasury bills in order to decrease the interest rate.
d) Refers to buying treasury bills in order to increase money supply.
e) c and d.
f) b and d.
Explanation / Answer
a) The answer is "D", none of the above. For reducing the inflation the Fed will sell the bonds and increase the interest rates.
b) The answer is "A", the negative relationship between the FFR and the price of the treasury bill is a result of a change in the supply of the bill. The more bills we have the fewer reserves will be there and higher the FFR will be and vice versa.
c) "None" a contractionary monetary policy reduces the money supply increases the interest rates and reduce the investment in the economy.
d) The answer is "E", contractionary fiscal policy reduces the taxes and interest rate in the economy with a reduction in the aggregate demand.
e) "B" the banking system determines the money supply and the aggregate demand in the economy.
f) "E"
the OMO at the time of recession increase the money supply and reduce the interest rates.
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