Question 8 (3 points) The tool of monetary policy that involves the Fed\'s buyin

Question

Question 8 (3 points)

The tool of monetary policy that involves the Fed's buying and selling of government bonds is:

Question 8 options:

The discount rate.

Moral suasion.

Open-market operations.

Reserve requirements.

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Question 9 (3 points)

The interest rate the Fed targets is the:

Question 9 options:

Prime rate.

Federal funds rate.

Discount rate.

AAA corporate bond rate.

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Question 10 (3 points)

When the Fed raises the target for the federal funds rate, it:

Question 10 options:

Increases the required reserve ratio.

Buys government bonds.

Sells government bonds.

Lowers the discount rate.

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The discount rate.

Moral suasion.

Open-market operations.

Reserve requirements.

Explanation / Answer

Answer:

Qn.8) Option c. Open Market Operations.

Explanation: Open market operation is one tool through which money supply can be controlled. Open market operations is done by the act of buying and selling of govt securities by the Fed. Fed buys securities from a bank when the bank is in need of funds so that the bank can lend out. As a result of this money supply increases. On the other hand when Fed wants to decrease the money supply Fed will issue bonds and securities which will be bought by the banks and this in turn will decrease the money supply.

Qn.9) Option b. Federal Funds Rate.

Explanation: This is the interest rate that the banks levy each other for lending federal reserve fund over night. These funds helps in maintaining the federal reserve requirements by the nations central bank. Reserve requirements stops banks from lending every amount they receive. Reserve requirements makes sure that the banks have got enough fund with them to begin each business day. This interest rate is used as a tool to maintain economic growth of the nation.

Qn.10) Option c. Sells government bonds.

Explanation: When the Fed increases the target federal fund rates it sells government issued securities. This is being done so that it can bring down the excess reserves that can be used for over night loans.

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