Question

23.Explain the​ Fed's policy tools and briefly describe how each works.

By increasing the required reserve​ ratio, the Fed forces banks to hold a​ _______ quantity of monetary base and the interest rate​ _______.

A.

​larger; rises

B.

​larger; falls

C.

​smaller; falls

D.

​smaller; rises

By lowering the interest​ rate, the Fed makes it​ _______ costly for the banks to borrow monetary base and the interest rate​ _______.

A.

​more; rises

B.

​more; falls

C.

​less; falls

D.

​less; rises

When the Fed sells securities in the open​ market, the monetary base​ _______ and the interest rate​ _______.

A.

​decreases; falls

B.

​increases; falls

C.

​decreases; rises

D.

​increases; rises

30.When the quantity of real GDP demanded exceeds the quantity of real GDP​ supplied, firms

A.

increase production and lower prices.

B.

increase production and prices.

C.

do not change production because aggregate demand and potential GDP will adjust.

D.

decrease production and prices.

E.

decrease production and increase prices.

Answer 1

23. A. Larger and rises. When reserve requirements are increased, commercial banks hold a large amount of deposits which reduce money supply and increase the interest rate.

24. C. Less, falls. When the Fed lowers the interest rate (discount rate) it becomes cheaper for the banks to borrow from the Central banks.

25 C. Decreases, rises. When the Fed sells securities in the open market, money supply contracts and interest rate rises.

30. B. Increase production and prices. Consumers will demand more goods which will increase the price level and producers will produce more goods.