Question

a) If the federal funds rate were below the level the Federal Reserve had targeted, the...

a) If the federal funds rate were below the level the Federal Reserve had targeted, the Fed could move the rate back towards its target by

    1. buying bonds. This buying would reduce reserves.
    1. buying bonds. This buying would increase reserves.
    1. selling bonds. This selling would reduce reserves.
    2. selling bonds. This selling would increase reserves.

b)  Last year a country had exports of $50 billion, imports of $60 billion, and domestic investment of $40 billion. What was its saving last year?

a. $30 billion

b. $20 billion

c. $10 billion

d. -$10 billion

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Answer #1

Option D i.e.selling bonds. This selling would increase reserves.

When a central bank sells bonds, then money from individual banks in the economy is flowing into the central bank—reducing the quantity of money in the economy. The demand for money is more as compared to supply. This will result in rise in interest rates. Also, more money will be kept in banks as reserves thus increasing the reserves.

b Option A i.e. 30 Billion.

Supply of Financial Capital = Demand for Financial Capital

S + ( M - X) = I + (G - T)

S + ( 60 - 50) = 40

S = 40 - 10

S = 30 Billion

In this equation, S is private savings, T is taxes, G is government spending, M is imports, X is exports, and I is investment

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