Reading 24: Money, the Price Level, and Inflation - LOS d ～ likely, efforts, interest, class

mayanfang1

Q1. Assume the economy is undergoing a recession. In its efforts to stimulate the economy by trying to influence short-term interest rates the Fed is most likely to take which two actions?

A)  Buy Treasury securities and decrease bank reserve requirements.

B)  Sell Treasury securities and increase bank reserve requirements.

C)  Sell Treasury securities and decrease bank reserve requirements.

Q2. David Wildstein, Harry Osajnuk, and Kurt Weil, are all junior economists at the Bank of Scarsdale. Over lunch they were discussing the U.S. Federal Reserve (the Fed) and the banking system in the United States. They made the following statements regarding the overall purpose of the Federal Reserve System:

Wildstein: In my opinion, the overall purpose and goal of the Federal Reserve System is to insure the deposits of individuals and firms holding funds with banking institutions.

Osajnuk: The overall goal of the Federal Reserve System is to keep the discount rate flexible so that if additional funds are needed in the economy the discount rate will be reduced and if there is too much money in the economy the discount rate will be increased.

Weil: The primary purpose of the Federal Reserve System is to regulate the amount of excess reserves held by member banks through the potential deposit expansion multiplier.

Are the statements made by Wildstein, Osajnuk, and Weil CORRECT?

            Wildstein          Osajnuk                                          Weil

 

A) Incorrect                          Incorrect                          Correct

B) Incorrect                          Incorrect                          Incorrect

C) Incorrect                          Correct                            Incorrect

Q3. Which one of the following Federal Reserve monetary policies, when pursued in line with the U.S. government’s fiscal policies, would help increase aggregate demand during a period of high unemployment?

A)  A decrease in the discount rate.

B)  The sale of bonds by the Fed.

C)  An increase in the reserve requirements for financial institutions.

mayanfang1

答案和详解如下：

Q4. Which of the following is least likely to appear as an asset on the U.S. Federal Reserve’s (Fed’s) balance sheet?

A)  Gold.

B)  U.S. Treasury bills.

C)  U.S. currency in circulation.

Correct answer is C)  

The assets of the U.S. Federal Reserve consist of: gold, deposits with other central banks, special drawing rights at the International Monetary Fund, U.S. Treasury bills, notes, and bonds, and loans to banks (reserves loaned at the discount rate). The great majority (over 90 percent) of the liabilities of the Federal Reserve are Federal Reserve notes, that is, U.S. currency in circulation. Bank reserve deposits are a small part of the Fed’s liabilities.

Q5. At a recent conference “The Fed – Where is it Going?”, Jason Alexdrovitch was discussing the policy tools that the U.S. central bank uses to control the money supply. During the conference he made the following statements:

Statement 1: If the Fed wanted to use all of its three major monetary policy tools to increase the money supply, the Fed would sell bonds, reduce the discount rate and increase bank reserve requirements.

Statement 2: If commercial banks are increasing their borrowings from the Federal Reserve banks, while the Fed is selling government securities, the borrowing of the commercial banks from the Fed will offset the effects of open market operations.

Are Statement 1 and Statement 2 as made by Alexdrovitch CORRECT?

        Statement 1                   Statement 2

 

A) Correct                           Incorrect

B) Incorrect                         Incorrect

C) Incorrect                         Correct

Correct answer is C)  

If the Fed wanted to use all of its three major monetary control tools to increase the money supply, the Fed would buy bonds, decrease the discount rate, and decrease the bank reserve requirements. Each of these actions would inject more money into the banking system.

When the Fed is selling government securities they are taking money out of the banking system thereby decreasing the money supply. But, if commercial banks are increasing their borrowings from the Fed, more money is being injected into the banking system. This increase in the money supply will offset the effects of the Fed’s open market operations.

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