3. Regulating the banking system is necessary a) Because the banking system dete
ID: 1155622 • Letter: 3
Question
3. Regulating the banking system is necessary
a) Because the banking system determines the money supply and money supply affects private investment.
b) To make sure that fiscal policy is not influenced mainly by profit minded banks.
c) b and a.
d) None of the above.
4. Open market operations in the time of inflation
a) Refers to selling treasury bills in order to decrease interest rate.
b) Refers to buying treasury bills in order to increase money supply
c) Refers to buying treasury bills in order to decrease the interest rate.
d) Refers to selling treasury bills in order to decrease the supply of reserves.
e) None.
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.
Explanation / Answer
3. both a and b
Because the banking system determines the money supply and money supply affects private investment which again affects the whole economy and To make sure that fiscal policy is not influenced mainly by profit minded banks as, the central bank controls all the banks and is custodian to monetary policy.
4. Refers to selling treasury bills in order to decrease the supply of reserves.
The central bank sells all these asset's in exchange of money. The motive of open market operation is to suck out the money from economy in order to reduce demand and hence, to reduce inflation.
b) When treasury bills become more cheaper, the effective return to their holders decreases.
6.b) The Fed can precisely target the interest rate but not the money supply.
As, by manipulating interest rates, fed may try to affect the money supply through varying interest rates but can't completely control it.
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