5) There is a negative relationship between the interest rate and the price of t
ID: 1155123 • Letter: 5
Question
5) There is a negative relationship between the interest rate and the price of treasury bills because
a) When treasury bills become more expensive, the effective return to their holders increases.
b) When treasury bills become more expensive, the effective return to their holders decreases.
c) When treasury bills become cheaper, the effective return to their holders increases.
d) When treasury bills become cheaper, the effective return to their holders decreases.
e) b and c.
6) Which of the following is correct?
a) The Fed can precisely target the money supply but not the interest rate.
b) The Fed can precisely target the interest rate but not the money supply.
c) The Fed can precisely target the money supply but not the supply of reserves.
d) The Fed can precisely target the supply of reserves but not the money supply.
e) b and d.
7) Which of the following is correct?
a) The Fed can precisely target the money supply because it can exactly determine the money multiplier.
b) The Fed can precisely target the interest rate because it can exactly determine the money multiplier.
c) The Fed cannot precisely target the money supply because it cannot exactly determine the money multiplier.
d) The Fed cannot precisely target the supply of reserves because it cannot exactly determine the money multiplier.
e) c and d.
8) If the rate of required reserves is 0.1, then the money multiplier is approximately
a) 5
b) 4
c) 10
d) 0.1
9) If the rate of required reserves is 0.2, then
a) A 2 percent increase in the interest rate increases the money supply by 4 percent.
b) A 2 percent increase in the interest rate decreases the money supply by 4 percent.
c) A 1 dollar increase in the reserves increases the money supply by 5 dollars.
d) A 1 dollar increase in the money supply increases the reserves by 5 dollars.
Explanation / Answer
Answer 5:
Option E. There is a negative relationship between the interest rate and the price of treasury bills because When treasury bills become more expensive, the effective return to their holders decreases and When treasury bills become cheaper, the effective return to their holders increases.
Answer 6:
Option D. The Fed can precisely target the supply of reserves but not the money supply. The money supply cannot be exactly taregtted by Central bank.
Answer 7:
Option C. The Fed cannot precisely target the money supply because it cannot exactly determine the money multiplier.The exact value of the money multiplier cannot be exactly determined.
Answer 8:
Option C. The money multiplier = 1 / .10 (required reserve ratio ) = 10
Answer 9:
Option C. Money multiplier = 1 / .2 = 5, thus A 1 dollar increase in the reserves increases the money supply by 5 dollars
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