Question

1.

When the Fed purchases government bonds, that tends to ___ the federal funds rate and ___ the prime rate.

	a.	increase; increase
	b.	increase; decrease
	c.	decrease; increase
	d.	decrease; decrease
	e.	None of the above

2.

How does the Federal Reserve affect the supply of money using open market operations?

	a.	The Fed increases the reserve requirements of bank and thus banks must obtain additional funds from the Fed.
	b.	The Fed buys government bonds from banks, which increases the banks’ reserves with the Fed and allows them to make new loans.
	c.	The Fed increases interest rates and then prints more money so that borrowers will be able to pay the higher rates.
	d.	The Fed sells government bonds, which increases aggregate demand and requires more money to be printed.
	e.	The Fed decreases the reserve requirements of banks, thus allowing more money to be in circulation.

3.

Everything else equal, a decrease in the federal funds rate will tend to…

	a.	increase aggregate demand.
	b.	decrease aggregate demand.
	c.	increase investment.
	d.	decrease investment.
	e.	both a. and c.

4.

The Fed can decrease the money supply by …

	a.	making an open market sale of bonds.
	b.	raising the required reserve ratio.
	c.	raising the discount rate.
	d.	making an open market purchase of bonds.
	e.	a., b., and c.

5.

Imagine that the federal funds rate is above the target that the Fed had announced. In order to keep the actual rate as close as possible to the target rate, the Fed will …

	a.	make an open market purchase of bonds.
	b.	make an open market sale of bonds.
	c.	do nothing since the Fed cannot influence the federal funds rate.
	d.	set the federal funds rate by law.
	e.	None of the above

Answer 1

1.When the Fed purchases government bonds, that tends to ___ the federal funds rate and ___ the prime rate.

d. decrease , decrease

2- the Federal Reserve affect the supply of money using open market operations:

b.The Fed buys government bonds from banks, which increases the banks’ reserves with the Fed and allows them to make new loans.

3.Everything else equal, a decrease in the federal funds rate will tend to

e. both a and c

it will increase the aggregate demand and investment

4- The Fed can decrease the money supply by :

e. a., b., and c.

to decrease the money supply fed will make an open market sale of bonds,raise the required reserve ratio and also will raise the discount rate

5.Imagine that the federal funds rate is above the target that the Fed had announced. In order to keep the actual rate as close as possible to the target rate, the Fed will:

a. make an open market purchase of bonds

it will reduce the federal fund rate