Microeconomics When the Fed Sells Bonds, This Term Paper

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Microeconomics

When the Fed sells bonds, this should:

increase the Federal funds rate.

reduce the reserve requirement.

increase the discount rate.

decrease the discount rate.

Suppose excess reserves in the banking system change from $100 to $110. Other things equal, we might expect this change to:

reduce the discount rate.

reduce the Federal funds rate.

raise the reserve requirement d. reduce the prime rate.

If the Fed funds rate is 6% and Fed's target for the Fed funds rate is 4%, then the Fed is most likely to:

reduce the reserve requirement.

sell government bonds.

raise the discount rate.

raise the reserve requirement.

Suppose that investment is not very responsive to interest rates, so that a sizable increase in interest rates has only a minor effect on investment.

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In this case, contractionary monetary policy would:

a. have no effect on output.

b. reduce output slightly.

c. reduce output significantly.

d. raise output significantly.

Which of the following is a problem for the Fed?

a. Knowing what policy to use.

b. Inability to control the monetary base.

c. Budget cuts threatened by Congress.

d. Political pressure from the public.

A liquidity trap is best described as a situation in which:

a. increasing reserves does not increase the money supply.

b. lowering interest rates leads to greater bankruptcies.

c. higher interest rates crowd out private investment.

d. increases in the velocity of money raise the money supply without Fed action.

If a decrease in the money….....

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