Question

Question 71 pts

The Federal Reserve encourages banks to be more aggressive in their lending activities:

by raising the discount rate.

in order to decrease excess reserves held by banks.

by selling Treasury bills, notes, bonds and certificates.

all of the above.

Flag this Question

Question 81 pts

If the Fed sells Treasury bills, then

the price of and the interest rate on Treasury bills will both rise.

the price of and the interest rate on Treasury bills will both fall.

the price of Treasury bills will fall AND the market rate of interest on Treasury bills will rise.

neither the price nor the market rate of interest on treasury bills will be affected.

Answer 1

1.The correct answer is: b)

Reason: By directing the banks to decrease their excess reserves, the Fed encourages the banks to increase credit lending and there increase the monetary base.

2.The correct answer is: c)

Reason: When the fed sells Treasury bills, there will be excess supply of Treasury bills in the market and thus the price of Treasury bills will fall and given the inverse relationship between price and interest rate, the market rate of interest on Treasury bills will rise when the price falls.

Thanks!