Question

4- What is it called when the Fed takes actions that result in an increase in the money supply?

A. Contractionary fiscal policy

B. Expansionary fiscal policy

C. Contractionary monetary policy

D. Expansionary monetary policy

5. If the federal government finances a deficit by borrowing, we can expect

A. National debt will decrease

B. More income taxes will be collected

C. Higher interest rates due to the higher demand for loanable funds

D. Higher Inflation in the economy

E. All of the above.

6. Which of the following policies can the central bank do to decrease the money supply?

A: Increase the reserve ratio

B: lower the discount rate

C: buy bonds in the open market

D: raise the fed funds rate

E: increase payroll taxes

Answer 1

4. D. Expansionary monetary policy

Expansionary monetary policy includes decrease in reserve requirement, federal funds rate, discount rate which causes increase in money supply.

5. C. Higher interest rates due to the higher demand for loanable funds

When government borrows more funds then interest rate increases as lending money with banks decreases.

6. A: Increase the reserve ratio

Increase in reserve ratio induces banks to keep more money in reserves and lend less money this causes decrease in the money supply.