Question

In pursuing its monetary policy goals, the Fed

Select one:

A. can easily address inflation and unemployment at the same time.

B. only ever needs to use an expansionary (stimulative) policy.

C. must choose between addressing inflation or unemployment, since these goals conflict.

D. has to follow the wishes of Congress.

When the Fed wants to increase the level of reserves in banks, it can

Select one:

A. increase the discount rate.

B. sell government bonds to banks.

C. buy government bonds from banks.

D. lower the required reserve ratio.

Answer 1

1. Must choos e between addressing inflation or unemployment, since these goals conflict. According to the Philips curve, change in inflation and unemployment are inversely related. Higher inflation leads to lower levels of unemployment and vice versa. So the central bank needs to prioritise between inflation and unemployment.

2. Increase the discount rate.

Discount rate is the rate at which central bank lends money to commercial banks. Higher discount rate raises the interest rate charged by banks to the public. Higher interest rate leads to lower borrowings. Hence, the reserves would increase with lower borrowings.