1. If the Federal Reserve authorities wanted to reduce inflationary pressures, t
ID: 1187188 • Letter: 1
Question
1. If the Federal Reserve authorities wanted to reduce inflationary pressures, the monetary policy
options would be to:
a. sell government securities, raise reserve requirements, and lower the discount rate.
b. sell government securities, lower reserve requirements, and lower the discount rate.
c. buy government securities, raise reserve requirements, and raise the discount rate.
d. sell government securities, raise reserve requirements, and raise the discount rate.
2. Fiscal policy adviser Jones wants to increase aggregate demand (aggregate expenditure) while monetary policy adviser Smith wants to reduce aggregate demand (aggregate expenditure). Which of the following combinations of fiscal and monetary policies would these two advisers suggest to achieve their conflicting goals?
a. tax decreases; open market sales of bonds by the Federal Reserve
b. tax decreases; open market purchases of bonds by the Federal Reserve
c. government spending decreases; an increase in the reserve requirements for commercial banks
d. equal decreases in taxes and government spending; an increase in the Federal Reserve
Explanation / Answer
1) Option C......................Buying the govt securities, increasing the reserve ratios and raising the discount rate all will decrease the supply of money in the market and thus reduce the inflationary pressures........................................... 2) Option B .......................Jones will advice an expansionary fiscal policy that is by reducing taxes whereas smith will suggest a contractionary monetary policy.......................... 3) Option A....................to move from point A to B is to reduce inflation which can be achieved by reducing the money supply by buying t-bills and thus sucking money from the economy.............................. 4) Option D................in short run the prices are sticky...inflation is constant.................... 5) Option D........payment for exports will be in US dollars which is strong..so it makes sense to increase the exports...whereas a depreciated canadian dollars means a fallen profitability due to owning a canadian hockey team........................ 6) Option A.......sell is in peso which is strong whereas the cost incurred are in weaker USD.......................... 7) Option A..................... 8) Option D...........they are inversely related.................. 9) Option A............for same level of employment the inflation is higher which is a rightward movement of the philips curve........................
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