Question

18: If the Fed buys securities on the open market, this will

A. reduce banks' excess reserves.
B. increases banks' excess reserves.
C. lower the reserve requirement.
D. contract the money supply.

19: The credit crisis of 2008 was mainly caused by:

A. High levels of credit card debt.
B. The sub-prime mortgage mess along with existing huge leveraged bets that prices of real estate made by investment banks and other firms not regulated by the Fed.
C. Home buyers' misrepresentation of repayment capacity.
D. A large number of home buyers losing their jobs.

20: The Fed Sells T-bonds. This:

A. raises bond prices which raises the interest rate.

B. lowers bond prices which raises the interest rate.

C. raises bond prices which lowers the interest rate.

D. lowers bond prices which lowers the interest rate.

Answer 1

18. The Fed uses open market operations( buying and selling of securities in the market) to control the money supply in the economy. Buying the securities by the Fed increases the money supply in the economy and selling the securities squeez out the money supply in the economy. I think the the first question is a mistake actualling buying of securities actually increase the money supply but the option is given as just opposite. The open market operations has nothing to do with the reserve ratios.

19. The credit crisis of 2008 is mainly caused by the sub-prime mortgage mess along with existing huge leveraged bets that prices of real estate made by investment banks and other firms not regulated by the Fed

20. The selling of t- bonds by the fed lowers the price of bonds and increases the interest rate, there is inverse relationship between bond prices and interest rate.