Question

If the Federal Reserve decided to raise interest rates, it could sell bonds to lower the...

If the Federal Reserve decided to raise interest rates, it could

sell bonds to lower the money supply.

buy bonds to raise the money supply.

buy bonds to lower the money supply.

sell bonds to raise the money supply

According to the equation of exchange, if real GDP and money supply stays the same,

inflation is always zero.

money velocity must stay the same.

the rate of inflation equals the rate of change in money velocity.

None of the above.

Homework Answers

Answer #1

Ans) buy bonds to raise the money supply is the correct option. There is a negative relationship between money supply and interest rate. Larger money supply will lower interest rate. the Fed can reduce the interest rate that it charges to give banks more reserve , thereby tempting banks to borrow more

Ans) the rate of inflation equals the rate of change in money velocity is the correct option. equation of exchange is MV = PY where M is money supply, P is price level, V is velocity ans T is transaction

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