Question

1. Suppose that the Fed makes a $100 billion open-market sale of Treasury bonds, and the money multiplier is 6. Which of the following impacts are most likely to result?
a. The money supply shifts inward, and the equilibrium interest rate rises in the money market.
b. The money supply shifts outward, and the equilibrium interest rate falls in the money market.
c. Investment declines, causing the aggregate demand curve to shift leftward, reducing equilibrium real GDP and thus slowing the economy.
d. Both answers a. and c. are correct.
e. Both answers b. and c. above are correct

2) If the Fed reduces the discount rate, which of the following are most likely to result?

a. The money supply curve shifts rightward, and the equilibrium interest rate falls in the money
market.
b. Investment spending declines, causing the aggregate demand curve to shift leftward, reducing equilibrium real GDP and thus slowing the economy.
c. Investment spending rises, causing the aggregate demand curve to shift rightward, increasing equilibrium real GDP and thus accelerating the economy.
d. Both answers a. and b. above are correct.
e. Both answers a. and c. above are correct

3) With trade, the production possibilities for two nations lie

a. outside their consumption possibilities.
b. inside their consumption possibilities.
c. at a point equal to the world production possibilities curve.
d. None of the answers above are correct.

4) Free-trade theory suggests that when trade takes place

a. both nations will be worse off.
b. one nation must gain at the other nation’s expense.
c. both nations are better off.
d. one nation will gain and the other nation will
be neither better nor worse off.

Answer 1

Question 1

When Fed makes open market sale of Treasury bonds then this reduces the excess reserves in the banking system.

Given the value of multiplier, this reduction in excess reserves leads to reduction in money supply.

This shifts the money supply curve to the left (or inward) which in result raises the interest rate in the money market.

Rise in interest rates raises the cost of borrowing which discourages businesses to borrow to make investment and thus investment declines.

This lead to fall in aggregate demand and results in fall in real GDP and slowing down of economy.

So, both options (a) and (c) are correct .

Thus, the correct answer is the option (d).